June 19, 2024

Motowndesserts

Automotive to Us

Is MotorCycle Holdings Limited’s (ASX:MTO) Recent Stock Performance Influenced By Its Financials In Any Way?

MotorCycle Holdings’ (ASX:MTO) stock is up by 3.9% over the past week. 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. Specifically, we decided to study MotorCycle Holdings’ 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for MotorCycle Holdings

How Is ROE Calculated?

ROE 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 MotorCycle Holdings is:

20% = AU$28m ÷ AU$144m (Based on the trailing twelve months to June 2021).

The ‘return’ refers to a company’s earnings over the last year. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.20 in profit.

Why Is ROE Important For 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. 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.

MotorCycle Holdings’ Earnings Growth And 20% ROE

To begin with, MotorCycle Holdings seems to have a respectable ROE. Even when compared to the industry average of 24% the company’s ROE looks quite decent. Despite the modest returns, MotorCycle Holdings’ five year net income growth was quite low, averaging at only 2.7%. So, there could be some other factors at play that could be impacting the company’s growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared MotorCycle Holdings’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 14% in the same period, which is a bit concerning.

past-earnings-growth

past-earnings-growth

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). This then helps them determine if the stock is placed for a bright or bleak future. Is MotorCycle Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MotorCycle Holdings Efficiently Re-investing Its Profits?

MotorCycle Holdings has a three-year median payout ratio of 51% (implying that it keeps only 49% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, MotorCycle Holdings has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 63% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 13%) over the same period.

Conclusion

In total, it does look like MotorCycle Holdings has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.