With its stock down 22% over the past three months, it is easy to disregard Micro-Mechanics (Holdings) (SGX:5DD). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Micro-Mechanics (Holdings)'s ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Micro-Mechanics (Holdings)
How Is ROE Calculated?
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 Micro-Mechanics (Holdings) is:
32% = S$16m ÷ S$52m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.32 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. 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. 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.
Micro-Mechanics (Holdings)'s Earnings Growth And 32% ROE
Firstly, we acknowledge that Micro-Mechanics (Holdings) has a significantly high ROE. Secondly, even when compared to the industry average of 25% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in Micro-Mechanics (Holdings)'s meagre five year net income growth average of 4.1%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Micro-Mechanics (Holdings)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 30% in the same period, which is a bit concerning.