U.S. markets open in 4 hours 32 minutes
  • S&P Futures

    3,775.50
    -27.75 (-0.73%)
     
  • Dow Futures

    30,141.00
    -224.00 (-0.74%)
     
  • Nasdaq Futures

    11,552.25
    -88.50 (-0.76%)
     
  • Russell 2000 Futures

    1,763.00
    -18.50 (-1.04%)
     
  • Crude Oil

    86.20
    -0.32 (-0.37%)
     
  • Gold

    1,722.80
    -7.70 (-0.44%)
     
  • Silver

    20.76
    -0.34 (-1.61%)
     
  • EUR/USD

    0.9949
    -0.0037 (-0.37%)
     
  • 10-Yr Bond

    3.6170
    0.0000 (0.00%)
     
  • Vix

    29.44
    -0.66 (-2.19%)
     
  • GBP/USD

    1.1423
    -0.0051 (-0.45%)
     
  • USD/JPY

    144.3510
    +0.1520 (+0.11%)
     
  • BTC-USD

    20,161.47
    +261.13 (+1.31%)
     
  • CMC Crypto 200

    456.61
    +11.17 (+2.51%)
     
  • FTSE 100

    7,002.62
    -83.84 (-1.18%)
     
  • Nikkei 225

    27,120.53
    +128.32 (+0.48%)
     

Is Magontec Limited's (ASX:MGL) Latest Stock Performance A Reflection Of Its Financial Health?

·4 min read

Magontec (ASX:MGL) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Magontec's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Magontec

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Magontec is:

14% = AU$5.0m ÷ AU$36m (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Magontec's Earnings Growth And 14% ROE

At first glance, Magontec seems to have a decent ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. This certainly adds some context to Magontec's exceptional 30% net income growth seen over the past five years. 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.

As a next step, we compared Magontec's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 25%.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Magontec's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Magontec Making Efficient Use Of Its Profits?

Magontec doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

In total, we are pretty happy with Magontec's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Magontec.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here