Masterflex SE (ETR: MZX) stock is up but financial data looks ambiguous: will the momentum continue?
Most readers already know that the share of Masterflex (ETR: MZX) has risen significantly by 21% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In this article, we have decided to focus on the ROE of Masterflex.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Masterflex
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Masterflex is:
2.4% = 1.0 million euros Ã· 43 million euros (based on the last twelve months up to March 2021).
The “return” is the annual profit. This means that for every â¬ 1 of equity, the company generated â¬ 0.02 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or âwithholdsâ and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Masterflex profit growth and 2.4% ROE
At first glance, Masterflex’s ROE isn’t much to say. Then, compared to the industry average ROE of 6.0%, the company’s ROE leaves us even less enthusiastic. For this reason, Masterflex’s 13% drop in net profit over five years is not surprising given its lower ROE. However, other factors can also lead to lower income. Such as – low profit retention or misallocation of capital.
In the next step, we compared the performance of Masterflex with the industry and found that the performance of Masterflex is depressing even when compared to the industry, which reduced its profits by 1.5% over the same period. period, which is slower than the business.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. What is MZX worth today? The intrinsic value infographic in our free research report helps to visualize whether MZX is currently poorly valued by the market.
Is Masterflex effectively reinvesting its profits?
Masterflex’s low three-year median payout ratio of 20% (implying that it keeps the remaining 80% of its profits) comes as a surprise when you associate it with declining profits. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, Masterflex paid dividends over a four-year period, suggesting that maintaining dividend payments is preferred by management even when earnings are declining. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 18% of its profits over the next three years. Still, forecasts suggest that Masterflex’s future ROE will reach 12% even though the company’s payout ratio is unlikely to change much.
Overall, we have mixed feelings about Masterflex. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. 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 the mentioned stocks.
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