Melexis (EBR: MELE) had a strong run in the equity market with its stock rising significantly by 18% over the past three months. 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. . Specifically, we have decided to study the ROE of Melexis in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Discover our latest analysis for Melexis
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Melexis is:
27% = 100 million euros ÷ 371 million euros (based on the last twelve months up to June 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every € 1 of share capital it has, the company has made € 0.27 in profit.
What does ROE have to do with 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 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. .
A side-by-side comparison of Melexis’ 27% profit growth and ROE
First of all, we love that Melexis has an impressive ROE. Second, even compared to the industry average of 12%, the company’s ROE is quite impressive. As might be expected, the 8.1% drop in net profit reported by Melexis does not bode well for us. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
That being said, we compared Melexis’ performance with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of 13% over the period. during the same period.
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. If you are wondering about the valuation of Melexis, take a look at this gauge of its price / earnings ratio, compared to its sector.
Is Melexis Using Its Profits Effectively?
Melexis’ decline in profits is not surprising given that the company spends most of its profits on paying dividends, judging by its three-year median payout rate of 86% (or a retention rate of 14 %). The company has only a small reserve of capital to reinvest – a vicious cycle that does not benefit the company in the long run.
In addition, Melexis has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 72% of its profits over the next three years. However, Melexis’ ROE is expected to increase to 37% although there is no expected change in its payout ratio.
All in all, it seems that Melexis has positive aspects for its business. However, we are disappointed to see a lack of earnings growth despite a high ROE. Keep in mind that the company reinvests a small portion of its profits, which means investors do not reap the benefits of the high rate of return. 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. 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 material. Simply Wall St has no position in the mentioned stocks.
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