Morgan Sindall Group plc's (LON:MGNS) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?
Morgan Sindall Group's (LON:MGNS) stock up by 5.5% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Morgan Sindall Group's ROE today.
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.
See our latest analysis for Morgan Sindall Group
How To Calculate Return On Equity?
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 Morgan Sindall Group is:
12% = UK£61m ÷ UK£496m (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Morgan Sindall Group's Earnings Growth And 12% ROE
At first glance, Morgan Sindall Group seems to have a decent ROE. Even when compared to the industry average of 12% the company's ROE looks quite decent. This certainly adds some context to Morgan Sindall Group's moderate 8.3% net income growth seen over the past five years.
As a next step, we compared Morgan Sindall Group'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 2.2%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is MGNS worth today? The intrinsic value infographic in our free research report helps visualize whether MGNS is currently mispriced by the market.
Is Morgan Sindall Group Efficiently Re-investing Its Profits?
Morgan Sindall Group has a three-year median payout ratio of 43%, which implies that it retains the remaining 57% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Additionally, Morgan Sindall Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 45%. Still, forecasts suggest that Morgan Sindall Group's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.
Summary
On the whole, we feel that Morgan Sindall Group's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
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