Yahoo Finance Can MGE Energy, Inc. (NASDAQ:MGEE) Performance Keep Up Given Its Mixed Bag Of Fundamentals?
MGE Energy's (NASDAQ:MGEE) stock is up by 7.8% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to MGE Energy's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for MGE Energy
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 MGE Energy is:
9.6% = US$93m ÷ US$974m (Based on the trailing twelve months to September 2020).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.10.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
MGE Energy's Earnings Growth And 9.6% ROE
When you first look at it, MGE Energy's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.4%, we may spare it some thought. Even so, MGE Energy has shown a fairly decent growth in its net income which grew at a rate of 5.4%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared MGE Energy's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.3% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about MGE Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is MGE Energy Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 54% (or a retention ratio of 46%) for MGE Energy suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, MGE Energy is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 49%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.
Conclusion
In total, we're a bit ambivalent about MGE Energy's performance. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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