In This Article:
Mitie Group (LON:MTO) has had a rough three months with its share price down 3.1%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Mitie Group's ROE in this article.
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.
See our latest analysis for Mitie Group
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Mitie Group is:
28% = UK£131m ÷ UK£474m (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.28 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. 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. 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.
Mitie Group's Earnings Growth And 28% ROE
First thing first, we like that Mitie Group has an impressive ROE. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. Under the circumstances, Mitie Group's considerable five year net income growth of 40% was to be expected.
Next, on comparing with the industry net income growth, we found that Mitie Group's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for MTO? You can find out in our latest intrinsic value infographic research report.
Is Mitie Group Efficiently Re-investing Its Profits?
Mitie Group has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Mitie Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.