Most readers would already know that Mikron Holding's (VTX:MIKN) stock increased by 4.9% 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. Particularly, we will be paying attention to Mikron Holding'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Mikron Holding
How Do You Calculate Return On Equity?
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 Mikron Holding is:
9.0% = CHF16m ÷ CHF174m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Mikron Holding's Earnings Growth And 9.0% ROE
To start with, Mikron Holding's ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 17% does temper our expectations. Mikron Holding was still able to see a decent net income growth of 7.3% over the past five years. So, there might be other aspects that are positively influencing earnings growth. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Mikron Holding compares quite favourably to the industry average, which shows a decline of 1.0% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Mikron Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.