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Micron Technology (NASDAQ:MU) has had a rough three months with its share price down 29%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Micron Technology's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Micron Technology is:
9.6% = US$4.7b ÷ US$49b (Based on the trailing twelve months to February 2025).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 in profit.
View our latest analysis for Micron Technology
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Micron Technology's Earnings Growth And 9.6% ROE
On the face of it, Micron Technology's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 12%. Having said that, Micron Technology's five year net income decline rate was 23%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.
However, when we compared Micron Technology's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 13% in the same period. This is quite worrisome.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is MU worth today? The intrinsic value infographic in our free research report helps visualize whether MU is currently mispriced by the market.