Is MHM Automation Limited's (NZSE:MHM) Recent Stock Performance Tethered To Its Strong Fundamentals?

MHM Automation's (NZSE:MHM) stock is up by a considerable 12% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to MHM Automation's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for MHM Automation

How To 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 MHM Automation is:

15% = NZ$1.8m ÷ NZ$12m (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.15 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

MHM Automation's Earnings Growth And 15% ROE

To begin with, MHM Automation seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This probably goes some way in explaining MHM Automation's significant 69% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared MHM Automation's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 22%.

past-earnings-growth
NZSE:MHM Past Earnings Growth September 15th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about MHM Automation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.