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Middlesex Water (NASDAQ:MSEX) has had a rough three months with its share price down 24%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Middlesex Water's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Middlesex Water
How Do You 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 Middlesex Water is:
7.8% = US$33m ÷ US$422m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.08 in profit.
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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Middlesex Water's Earnings Growth And 7.8% ROE
On the face of it, Middlesex Water'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 8.1%. Having said that, Middlesex Water has shown a meagre net income growth of 3.6% over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.
As a next step, we compared Middlesex Water's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.9% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Middlesex Water fairly valued compared to other companies? These 3 valuation measures might help you decide.