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Micro-Mechanics (Holdings)'s (SGX:5DD) stock up by 2.5% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Micro-Mechanics (Holdings)'s ROE in this article.
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.
Check out our latest analysis for Micro-Mechanics (Holdings)
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Micro-Mechanics (Holdings) is:
17% = S$8.4m ÷ S$49m (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.17 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Micro-Mechanics (Holdings)'s Earnings Growth And 17% ROE
To start with, Micro-Mechanics (Holdings)'s ROE looks acceptable. On comparing with the average industry ROE of 5.5% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Micro-Mechanics (Holdings)'s net income shrunk at a rate of 9.7% over the past five years. Therefore, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Micro-Mechanics (Holdings)'s earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 9.7% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Micro-Mechanics (Holdings) is trading on a high P/E or a low P/E, relative to its industry.