Michelmersh Brick Holdings plc's (LON:MBH) Stock Is Going Strong: Is the Market Following Fundamentals?

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

Mon, May 27, 2024, 8:01 AM 3 min read

Most readers would already be aware that Michelmersh Brick Holdings' (LON:MBH) stock increased significantly by 14% 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 Michelmersh Brick Holdings' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Michelmersh Brick Holdings

How Is ROE Calculated?

Return on equity 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 Michelmersh Brick Holdings is:

10% = UK£9.7m ÷ UK£93m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Michelmersh Brick Holdings' Earnings Growth And 10% ROE

To start with, Michelmersh Brick Holdings' ROE looks acceptable. Even when compared to the industry average of 9.5% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 9.0% seen over the past five years by Michelmersh Brick Holdings.

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 9.0% in the same 5-year period.

past-earnings-growth — AIM:MBH Past Earnings Growth May 27th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. Is MBH fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Michelmersh Brick Holdings Efficiently Re-investing Its Profits?

Michelmersh Brick Holdings has a three-year median payout ratio of 48%, which implies that it retains the remaining 52% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Michelmersh Brick Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 44%. As a result, Michelmersh Brick Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.4% for future ROE.

Conclusion

On the whole, we feel that Michelmersh Brick Holdings' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.