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Michelmersh Brick Holdings' (LON:MBH) stock is up by a considerable 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Michelmersh Brick Holdings' 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.
View our latest analysis for Michelmersh Brick Holdings
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 Michelmersh Brick Holdings is:
8.9% = UK£8.1m ÷ UK£91m (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.09 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 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.
Michelmersh Brick Holdings' Earnings Growth And 8.9% ROE
On the face of it, Michelmersh Brick Holdings' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.8%, is definitely interesting. This certainly adds some context to Michelmersh Brick Holdings' moderate 7.1% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.
We then performed a comparison between Michelmersh Brick Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 6.5% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. Is MBH fairly valued? This infographic on the company's intrinsic value has everything you need to know.