Yahoo Finance Is Meta Platforms, Inc.'s (NASDAQ:META) Recent Stock Performance Tethered To Its Strong Fundamentals?
Meta Platforms (NASDAQ:META) has had a great run on the share market with its stock up by a significant 6.8% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Meta Platforms' ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Meta Platforms
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Meta Platforms is:
31% = US$46b ÷ US$150b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.31 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Meta Platforms' Earnings Growth And 31% ROE
First thing first, we like that Meta Platforms has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.4% which is quite remarkable. This probably laid the groundwork for Meta Platforms' moderate 11% net income growth seen over the past five years.
We then compared Meta Platforms' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.0% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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. What is META worth today? The intrinsic value infographic in our free research report helps visualize whether META is currently mispriced by the market.
Is Meta Platforms Efficiently Re-investing Its Profits?
Meta Platforms has a low three-year median payout ratio of 2.8%, meaning that the company retains the remaining 97% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 9.2% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 23% over the same period.
Conclusion
Overall, we are quite pleased with Meta Platforms' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
