Is the recent performance of Mueller Industries, Inc. (NYSE:MLI) stock driven by its attractive financial outlook?

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Most readers already know that shares of Mueller Industries (NYSE:MLI) rose a significant 7.9% over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of Mueller Industries in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Mueller Industries

How is ROE calculated?

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 Mueller Industries is:

40% = $569 million ÷ $1.4 billion (based on trailing 12 months to March 2022).

The “return” is the annual profit. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.40.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Mueller Industries earnings growth and ROE of 40%

For starters, Mueller Industries has a pretty high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 13% also does not go unnoticed by us. So, the substantial net income growth of 39% seen by Mueller Industries over the past five years is not too surprising.

We then compared the net income growth of Mueller Industries with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 10% in during the same period.

NYSE: MLI Past Earnings Growth April 25, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Mueller Industries is trading on a high P/E or a low P/E, relative to its industry.

Does Mueller Industries Use Retained Earnings Effectively?

Mueller Industries’ three-year median payout ratio to shareholders is 17%, which is quite low. This implies that the company retains 83% of its profits. So it looks like Mueller Industries is massively reinvesting its earnings to grow its business, which is reflected in its earnings growth.

Additionally, Mueller Industries has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with shareholders.

Conclusion

All in all, we are quite satisfied with the performance of Mueller Industries. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. To see the 1 risk we have identified for Mueller Industries, visit our risk dashboard for free.

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.

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