Is Weakness In Mensch und Maschine Software SE (ETR:MUM) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Feb 2, 2025, 10:24 PM 4 min read

With its stock down 4.4% over the past three months, it is easy to disregard Mensch und Maschine Software (ETR:MUM). 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 Mensch und Maschine Software's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Mensch und Maschine Software

How To 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 Mensch und Maschine Software is:

34% = €35m ÷ €103m (Based on the trailing twelve months to September 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 €0.34 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Mensch und Maschine Software's Earnings Growth And 34% ROE

Firstly, we acknowledge that Mensch und Maschine Software has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. This likely paved the way for the modest 14% net income growth seen by Mensch und Maschine Software over the past five years.

As a next step, we compared Mensch und Maschine Software's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.2%.

past-earnings-growth — XTRA:MUM Past Earnings Growth February 3rd 2025

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. What is MUM worth today? The intrinsic value infographic in our free research report helps visualize whether MUM is currently mispriced by the market.

Is Mensch und Maschine Software Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 87% (or a retention ratio of 13%) for Mensch und Maschine Software suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Mensch und Maschine Software is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 81%.

Conclusion

Overall, we are quite pleased with Mensch und Maschine Software's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.