Does the impressive stock performance of Masimo Corporation (NASDAQ: MASI) have something to do with its fundamentals?

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Masimo (NASDAQ: MASI) has had a strong run in the equity market with a significant 17% share increase in the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we decided to study Masimo’s ROE in this article.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.

See our latest review for Masimo

How is the ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Masimo’s ROE is:

17% = US $ 229 million ÷ US $ 1.3 billion (based on the last twelve months to April 2021).

The “return” is the annual profit. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.17.

What does ROE have to do with profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A side-by-side comparison of Masimo’s profit growth and 17% ROE

For starters, Masimo’s ROE seems acceptable. Compared to the industry’s average ROE of 10%, the company’s ROE looks quite remarkable. Despite this, Masimo’s five-year net income growth was quite weak, averaging just 3.5%. This is usually not the case, because when a business has a high rate of return, it should generally also have a high rate of profit growth. Some probable reasons why this could happen are that the company could have a high payout ratio or the company has misallocated capital, for example.

In the next step, we compared Masimo’s net income growth with that of the industry and were disappointed to find that the company’s growth is below the industry’s average growth of 14% over the same period. .

NasdaqGS: MASI Past Profit Growth July 13, 2021

Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. If you’re wondering about Masimo’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Masimo Using Its Retained Earnings Effectively?

Conclusion

Overall, we think Masimo has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. However, the latest analyst forecasts show that the company will continue to see its profits increase. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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