Yahoo Finance Should Weakness in Monadelphous Group Limited's (ASX:MND) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
Monadelphous Group (ASX:MND) has had a rough month with its share price down 5.5%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Monadelphous Group's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Monadelphous Group
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Monadelphous Group is:
13% = AU$62m ÷ AU$466m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.13 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Monadelphous Group's Earnings Growth And 13% ROE
To start with, Monadelphous Group's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. This probably goes some way in explaining Monadelphous Group's moderate 6.2% growth over the past five years amongst other factors.
As a next step, we compared Monadelphous Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 25% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Monadelphous Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Monadelphous Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 90% (or a retention ratio of 9.8%) for Monadelphous Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Monadelphous Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 90%. However, Monadelphous Group's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we feel that Monadelphous Group certainly does have some positive factors to consider. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.
