Yahoo Finance Are Strong Financial Prospects The Force That Is Driving The Momentum In Morgan Sindall Group plc's LON:MGNS) Stock?
Morgan Sindall Group (LON:MGNS) has had a great run on the share market with its stock up by a significant 6.7% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Morgan Sindall Group's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Morgan Sindall Group
How Is ROE Calculated?
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:
21% = UK£101m ÷ UK£487m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.21 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. 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 21% ROE
At first glance, Morgan Sindall Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.3%. This certainly adds some context to Morgan Sindall Group's decent 12% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 2.6% in the same period, the company's net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Morgan Sindall Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Morgan Sindall Group Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 43% (implying that the company retains 57% of its profits), it seems that Morgan Sindall Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 46%. Accordingly, forecasts suggest that Morgan Sindall Group's future ROE will be 20% which is again, similar to the current ROE.
Conclusion
On the whole, we feel that Morgan Sindall Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
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