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With its stock down 25% over the past three months, it is easy to disregard Mesa Royalty Trust (NYSE:MTR). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Mesa Royalty Trust's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Mesa Royalty Trust
How Do You Calculate Return On Equity?
ROE 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 Mesa Royalty Trust is:
28% = US$880k ÷ US$3.1m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.28 in profit.
Why Is ROE Important For 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 Mesa Royalty Trust's Earnings Growth And 28% ROE
First thing first, we like that Mesa Royalty Trust has an impressive ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. As a result, Mesa Royalty Trust's exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Mesa Royalty Trust'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 40% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for MTR? You can find out in our latest intrinsic value infographic research report