In This Article:
With its stock down 22% over the past three months, it is easy to disregard MYR Group (NASDAQ:MYRG). 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. Specifically, we decided to study MYR Group'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for MYR Group is:
5.0% = US$30m ÷ US$600m (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.05 in profit.
See our latest analysis for MYR Group
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
MYR Group's Earnings Growth And 5.0% ROE
On the face of it, MYR Group's 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 21% either. As a result, MYR Group reported a very low income growth of 3.9% over the past five years.
As a next step, we compared MYR Group'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 13% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is MYR Group fairly valued compared to other companies? These 3 valuation measures might help you decide.