Canada markets close in 5 hours 19 minutes
  • S&P/TSX

    20,420.08
    -41.85 (-0.20%)
     
  • S&P 500

    4,447.25
    -1.73 (-0.04%)
     
  • DOW

    34,757.30
    -7.52 (-0.02%)
     
  • CAD/USD

    0.7876
    -0.0026 (-0.33%)
     
  • CRUDE OIL

    73.73
    +0.43 (+0.59%)
     
  • BTC-CAD

    54,110.94
    -2,261.31 (-4.01%)
     
  • CMC Crypto 200

    1,060.76
    -42.30 (-3.84%)
     
  • GOLD FUTURES

    1,748.40
    -1.40 (-0.08%)
     
  • RUSSELL 2000

    2,253.29
    -5.76 (-0.25%)
     
  • 10-Yr Bond

    1.4510
    +0.0410 (+2.91%)
     
  • NASDAQ

    14,993.95
    -58.30 (-0.39%)
     
  • VOLATILITY

    18.48
    -0.15 (-0.81%)
     
  • FTSE

    7,068.08
    -10.27 (-0.15%)
     
  • NIKKEI 225

    30,248.81
    +609.41 (+2.06%)
     
  • CAD/EUR

    0.6724
    -0.0003 (-0.04%)
     

Is Mitek Systems, Inc.'s (NASDAQ:MITK) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Mitek Systems' (NASDAQ:MITK) stock is up by a considerable 17% over the past three months. 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. Particularly, we will be paying attention to Mitek Systems' ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Mitek Systems

How To 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 Mitek Systems is:

5.7% = US$9.5m ÷ US$168m (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Mitek Systems' Earnings Growth And 5.7% ROE

On the face of it, Mitek Systems' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. Although, we can see that Mitek Systems saw a modest net income growth of 8.0% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Mitek Systems' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for MITK? You can find out in our latest intrinsic value infographic research report.

Is Mitek Systems Using Its Retained Earnings Effectively?

Conclusion

In total, it does look like Mitek Systems has some positive aspects to its business. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting