With its stock down 18% in the past three months, it’s easy to overlook MGE Energy (NASDAQ: MGEE). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape long-term market trends. We will be paying particular attention today to the ROE of MGE Energy.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for MGE Energy
How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, MGE Energy’s ROE is:
9.6% = $103 million ÷ $1.1 billion (based on trailing 12 months to September 2022).
The “return” is the annual profit. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.10.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of MGE Energy’s earnings growth and ROE of 9.6%
At first glance, MGE Energy’s ROE does not make much noise. However, since the company’s ROE is similar to the industry average ROE of 9.1%, we can spare it some thought. That said, MGE Energy has posted meager net profit growth of 3.5% over the past five years. Remember that the company’s ROE is not particularly good to start with. So this could also be one of the reasons for the company’s weak earnings growth.
We then compared MGE Energy’s net profit growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 7.5% over the same period. , which is a little disturbing.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about MGE Energy’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does MGE Energy use its profits efficiently?
MGE Energy has a three-year median payout ratio of 54% (implying that it only retains 46% of its earnings), which means that it pays out most of its earnings to shareholders in the form of dividends and , as a result, the company experienced weak earnings growth.
Additionally, MGE Energy has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 47%. As a result, MGE Energy’s ROE is not expected to change much either, which we have inferred from analysts’ estimate of 11% for future ROE.
All in all, we would find it difficult to think before deciding on any investment action concerning MGE Energy. Due to its low ROE and lack of reinvestment in the business, the company experienced a disappointing earnings growth rate. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Join a Paid User Research Session
You will receive a $30 Amazon Gift Card for 1 hour of your time while helping us create better investment tools for individual investors like you. register here