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With its stock down 20% over the past week, it is easy to disregard Morgan Advanced Materials (LON:MGAM). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Morgan Advanced Materials' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Morgan Advanced Materials
How To 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 Morgan Advanced Materials is:
15% = UK£59m ÷ UK£389m (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.15 in profit.
What Has ROE Got To Do With 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. 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.
Morgan Advanced Materials' Earnings Growth And 15% ROE
To begin with, Morgan Advanced Materials seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. This probably goes some way in explaining Morgan Advanced Materials' moderate 15% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that Morgan Advanced Materials' growth is quite high when compared to the industry average growth of 9.3% in the same period, which is great to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for MGAM? You can find out in our latest intrinsic value infographic research report.