MGE Energy, Inc. (NASDAQ:MGEE) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?
MGE Energy (NASDAQ:MGEE) has had a rough three months with its share price down 15%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on MGE Energy's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for MGE Energy
How Is ROE Calculated?
Return on equity 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 MGE Energy is:
10% = US$118m ÷ US$1.1b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.10 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of MGE Energy's Earnings Growth And 10% ROE
At first glance, MGE Energy seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.0%. This probably goes some way in explaining MGE Energy's moderate 6.9% growth over the past five years amongst other factors.
We then performed a comparison between MGE Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.8% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is MGE Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is MGE Energy Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 52% (or a retention ratio of 48%) for MGE Energy suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, MGE Energy is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 46%. As a result, MGE Energy's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.
Summary
On the whole, we feel that MGE Energy's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. To gain further insights into MGE Energy's past profit growth, check out this visualization 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.
