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Manawa Energy (NZSE:MNW) has had a rough three months with its share price down 5.8%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Manawa Energy'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Manawa Energy
How Do You Calculate Return On Equity?
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 Manawa Energy is:
2.0% = NZ$24m ÷ NZ$1.2b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.02 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. 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.
Manawa Energy's Earnings Growth And 2.0% ROE
It is hard to argue that Manawa Energy's ROE is much good in and of itself. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. As a result, Manawa Energy's flat earnings over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared Manawa Energy's net income growth with the industry and discovered that the industry saw an average growth of 6.1% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. 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 Manawa Energy is trading on a high P/E or a low P/E, relative to its industry.