Does its finances have a role to play in Mercury Systems, Inc.’s (NASDAQ:MRCY) recent stock run?

Most readers will already know that Mercury Systems (NASDAQ:MRCY) stock is up a significant 20% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of Mercury Systems.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Mercury Systems

How is ROE calculated?

the ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Mercury Systems is:

2.6% = $39 million ÷ $1.5 billion (based on trailing 12 months to October 2021).

The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.03.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Mercury Systems earnings growth and ROE of 2.6%

It’s hard to say that Mercury Systems’ ROE is very good on its own. Even compared to the industry average ROE of 13%, the company’s ROE is pretty dismal. Despite this, Mercury Systems has been able to grow its bottom line significantly, at a rate of 22% over the past five years. Therefore, there could be other reasons behind this growth. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing with the industry net income growth, we found that Mercury Systems’ growth is quite high compared to the average industry growth of 12% over the same period, which is great to see.

NasdaqGS: MRCY Past Earnings Growth January 15, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Is the MRCY correctly valued? This intrinsic business value infographic has everything you need to know.

Does Mercury Systems effectively reinvest its profits?

Mercury Systems pays no dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.

Summary

All in all, it looks like Mercury Systems has positives for its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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