Advertisement
Australia markets open in 6 minutes
  • ALL ORDS

    7,895.90
    -39.80 (-0.50%)
     
  • AUD/USD

    0.6631
    -0.0004 (-0.06%)
     
  • ASX 200

    7,628.20
    -37.40 (-0.49%)
     
  • OIL

    77.77
    -0.14 (-0.18%)
     
  • GOLD

    2,364.90
    -1.60 (-0.07%)
     
  • Bitcoin AUD

    103,136.34
    +1,198.37 (+1.18%)
     
  • CMC Crypto 200

    1,431.49
    -24.38 (-1.67%)
     

Are Robust Financials Driving The Recent Rally In MACOM Technology Solutions Holdings, Inc.'s (NASDAQ:MTSI) Stock?

Most readers would already be aware that MACOM Technology Solutions Holdings' (NASDAQ:MTSI) stock increased significantly by 5.5% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to MACOM Technology Solutions Holdings' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for MACOM Technology Solutions Holdings

How Is ROE Calculated?

The formula for ROE is:

ADVERTISEMENT

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

So, based on the above formula, the ROE for MACOM Technology Solutions Holdings is:

38% = US$331m ÷ US$863m (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.38.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

MACOM Technology Solutions Holdings' Earnings Growth And 38% ROE

Firstly, we acknowledge that MACOM Technology Solutions Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. As a result, MACOM Technology Solutions Holdings' exceptional 60% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared MACOM Technology Solutions Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 28%.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about MACOM Technology Solutions Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MACOM Technology Solutions Holdings Using Its Retained Earnings Effectively?

MACOM Technology Solutions Holdings doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we feel that MACOM Technology Solutions Holdings' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here