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With its stock down 32% over the past three months, it is easy to disregard M.T.I Wireless Edge (LON:MWE). 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. Particularly, we will be paying attention to M.T.I Wireless Edge's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for M.T.I Wireless Edge

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 M.T.I Wireless Edge is:

14% = US$3.9m ÷ US$27m (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.14 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. 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. 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.

A Side By Side comparison of M.T.I Wireless Edge's Earnings Growth And 14% ROE

To start with, M.T.I Wireless Edge's ROE looks acceptable. Even when compared to the industry average of 14% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by M.T.I Wireless Edge.

Next, on comparing M.T.I Wireless Edge's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is MWE worth today? The intrinsic value infographic in our free research report helps visualize whether MWE is currently mispriced by the market.