Australia markets closed
  • ALL ORDS

    7,490.10
    -178.80 (-2.33%)
     
  • ASX 200

    7,175.80
    -166.60 (-2.27%)
     
  • AUD/USD

    0.7187
    -0.0041 (-0.56%)
     
  • OIL

    84.83
    -0.72 (-0.84%)
     
  • GOLD

    1,836.10
    -6.50 (-0.35%)
     
  • BTC-AUD

    49,261.36
    -777.52 (-1.55%)
     
  • CMC Crypto 200

    870.86
    +628.18 (+258.85%)
     
  • AUD/EUR

    0.6333
    -0.0054 (-0.85%)
     
  • AUD/NZD

    1.0702
    +0.0008 (+0.07%)
     
  • NZX 50

    12,348.00
    -149.10 (-1.19%)
     
  • NASDAQ

    14,438.40
    -408.06 (-2.75%)
     
  • FTSE

    7,494.13
    -90.88 (-1.20%)
     
  • Dow Jones

    34,265.37
    -450.02 (-1.30%)
     
  • DAX

    15,603.88
    -308.45 (-1.94%)
     
  • Hang Seng

    24,965.55
    +13.20 (+0.05%)
     
  • NIKKEI 225

    27,522.26
    -250.67 (-0.90%)
     

Is Mirvac Group's (ASX:MGR) Recent Performancer Underpinned By Weak Financials?

  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • MRVGF

With its stock down 9.2% over the past three months, it is easy to disregard Mirvac Group (ASX:MGR). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Mirvac Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Mirvac Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Mirvac Group is:

8.4% = AU$899m ÷ AU$11b (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.08.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Mirvac Group's Earnings Growth And 8.4% ROE

At first glance, Mirvac Group's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. Therefore, it might not be wrong to say that the five year net income decline of 12% seen by Mirvac Group was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared Mirvac Group's performance with the industry and found thatMirvac Group's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.3% in the same period, which is a slower than the company.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is MGR worth today? The intrinsic value infographic in our free research report helps visualize whether MGR is currently mispriced by the market.

Is Mirvac Group Efficiently Re-investing Its Profits?

Mirvac Group has a very high three-year median payout ratio of 62%, implying that it retains only 38% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this likely explains why its earnings have been shrinking.

Additionally, Mirvac Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 67%. Still, forecasts suggest that Mirvac Group's future ROE will drop to 6.5% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we would be extremely cautious before making any decision on Mirvac Group. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting