Mesa Royalty Trust's (NYSE:MTR) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Mesa Royalty Trust's (NYSE:MTR) stock is up by a considerable 74% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Mesa Royalty Trust's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Mesa Royalty Trust
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 Mesa Royalty Trust is:
53% = US$1.4m ÷ US$2.6m (Based on the trailing twelve months to March 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.53 in profit.
Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Mesa Royalty Trust's Earnings Growth And 53% ROE
First thing first, we like that Mesa Royalty Trust has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. As you might expect, the 29% net income decline reported by Mesa Royalty Trust doesn't bode well with us. So, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 7.1% in the same period, we still found Mesa Royalty Trust's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MTR worth today? The intrinsic value infographic in our free research report helps visualize whether MTR is currently mispriced by the market.
Is Mesa Royalty Trust Using Its Retained Earnings Effectively?
Mesa Royalty Trust has a high three-year median payout ratio of 100% (that is, it is retaining -0.3% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 5 risks we have identified for Mesa Royalty Trust.
Moreover, Mesa Royalty Trust has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
On the whole, we feel that the performance shown by Mesa Royalty Trust can be open to many interpretations. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Up till now, we've only made a short study of the company's growth data. You can do your own research on Mesa Royalty Trust and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
