Middlesex Water Company's (NASDAQ:MSEX) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Middlesex Water's (NASDAQ:MSEX) stock is up by a considerable 5.3% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Middlesex Water's ROE in this article.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Middlesex Water
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Middlesex Water is:
8.9% = US$36m ÷ US$405m (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.09 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Middlesex Water's Earnings Growth And 8.9% ROE
On the face of it, Middlesex Water's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.5%, we may spare it some thought. Even so, Middlesex Water has shown a fairly decent growth in its net income which grew at a rate of 7.6%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing Middlesex Water's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.8% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Middlesex Water's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Middlesex Water Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 48% (implying that the company retains 52% of its profits), it seems that Middlesex Water is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Middlesex Water 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.
Summary
Overall, we feel that Middlesex Water certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Middlesex Water.
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.
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