M.T.I Wireless Edge Ltd.'s (LON:MWE) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Apr 28, 2024, 1:46 AM 4 min read

Most readers would already be aware that M.T.I Wireless Edge's (LON:MWE) stock increased significantly by 27% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to M.T.I Wireless Edge's ROE today.

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 M.T.I Wireless Edge

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 M.T.I Wireless Edge is:

14% = US$4.1m ÷ US$29m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

M.T.I Wireless Edge's Earnings Growth And 14% ROE

To begin with, M.T.I Wireless Edge seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. Probably as a result of this, M.T.I Wireless Edge was able to see a decent growth of 9.6% over the last five years.

We then compared M.T.I Wireless Edge's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 18% in the same 5-year period, which is a bit concerning.

past-earnings-growth — AIM:MWE Past Earnings Growth April 28th 2024

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is MWE worth today? The intrinsic value infographic in our free research report helps visualize whether MWE is currently mispriced by the market.

Is M.T.I Wireless Edge Using Its Retained Earnings Effectively?

M.T.I Wireless Edge has a significant three-year median payout ratio of 68%, meaning that it is left with only 32% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, M.T.I Wireless Edge has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 73% of its profits over the next three years. Accordingly, forecasts suggest that M.T.I Wireless Edge's future ROE will be 13% which is again, similar to the current ROE.

Summary

On the whole, we do feel that M.T.I Wireless Edge has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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. 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.

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

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.