Is Macquarie Telecom Group Limited's (ASX:MAQ) Latest Stock Performance A Reflection Of Its Financial Health?
Macquarie Telecom Group's (ASX:MAQ) stock is up by a considerable 51% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Macquarie Telecom Group's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Macquarie Telecom Group
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Macquarie Telecom Group is:
11% = AU$14m ÷ AU$122m (Based on the trailing twelve months to June 2020).
The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.11.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Macquarie Telecom Group's Earnings Growth And 11% ROE
To start with, Macquarie Telecom Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This probably goes some way in explaining Macquarie Telecom Group's significant 31% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Macquarie Telecom Group's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Macquarie Telecom Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Macquarie Telecom Group Using Its Retained Earnings Effectively?
Macquarie Telecom Group has a significant three-year median payout ratio of 63%, meaning the company only retains 37% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 25% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
Overall, we are quite pleased with Macquarie Telecom Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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