Most readers already know that Materion (NYSE: MTRN) stock has risen significantly 24% over the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will be paying close attention to Materion’s ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Materion
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, Materion’s ROE is:
8.7% = US $ 61 million Ã· US $ 697 million (based on the last twelve months to October 2021).
The âreturnâ is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.09 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion 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 everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Materion profit growth and ROE of 8.7%
At first glance, Materion’s ROE isn’t much to say. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 19%. However, we can see that Materion has seen modest growth in its net income of 14% over the past five years. We think there might be other factors at play here. For example, the business has a low payout ratio or is managed efficiently.
Then, comparing Materion’s net income growth with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 15% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading towards clear blue waters or if swampy waters are ahead of them. What is MTRN worth today? The intrinsic value infographic in our free research report helps to visualize whether MTRN is currently being poorly valued by the market.
Is Materion effectively reinvesting its profits?
Materion has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention rate of 71%) and a respectable amount of earnings growth as we’ve seen above, which means that the company made efficient use of its profits.
In addition, Materion is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 9.8% over the next three years. Thus, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 12% over the same period.
Overall, we think Materion has some positive attributes. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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