Minerals Technologies Inc (NYSE:MTX) had a tough week with its stock price down 11%. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on the ROE of Minerals Technologies.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Minerals Technologies
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Minerals Technologies is:
11% = $172 million ÷ $1.6 billion (based on trailing 12 months to April 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 $0.11.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Minerals Technologies earnings growth and 11% ROE
For starters, Minerals Technologies’ ROE looks acceptable. Still, the fact that the company’s ROE is below the industry average of 17% tempers our expectations. Needless to say, the 5.2% contraction rate in net income that Minerals Technologies has seen over the past five years is a huge drag. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, the decline in earnings could be the result of other factors. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
However, when we compared the growth of Minerals Technologies with the industry, we found that although the company’s earnings declined, the industry experienced earnings growth of 7.8% over the same period. It’s quite worrying.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Minerals Technologies correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Minerals Technologies use its profits effectively?
When we piece together Minerals Technologies’ low three-year median payout ratio of 5.0% (where it keeps 95% of its earnings), calculated for the last three-year period, we are surprised at the lack of growth. The low payout should mean that the company keeps most of its profits and therefore should see some growth. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, Minerals Technologies has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. company. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 3.1% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.
Overall, we believe that Minerals Technologies certainly has positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.