MotorCycle Holdings’ ROE.” data-reactid=”28″>Most readers would already be aware that MotorCycle Holdings’ (ASX:MTO) stock increased significantly by 57% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on MotorCycle Holdings’ ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Do You Calculate Return On Equity?
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for MotorCycle Holdings is:
5.7% = AU$7.9m ÷ AU$139m (Based on the trailing twelve months to December 2019).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.06.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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 MotorCycle Holdings’ Earnings Growth And 5.7% ROE
When you first look at it, MotorCycle Holdings’ ROE doesn’t look that attractive. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 16%. Although, we can see that MotorCycle Holdings saw a modest net income growth of 14% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing MotorCycle Holdings’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 14% in the same period.
this gauge of its price-to-earnings ratio, as compared to its industry.” data-reactid=”58″>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. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about MotorCycle Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is MotorCycle Holdings Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 63% (or a retention ratio of 37%) for MotorCycle Holdings suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.
Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 44% over the next three years. As a result, the expected drop in MotorCycle Holdings’ payout ratio explains the anticipated rise in the company’s future ROE to 7.9%, over the same period.
Click here to be taken to our analyst’s forecasts page for the company.” data-reactid=”67″>On the whole, we do feel that MotorCycle Holdings has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. 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.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”68″>This article by Simply Wall St is general in nature. 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.