Yahoo Finance What You Must Know About The Manitowoc Company Inc’s (NYSE:MTW) 5.27% ROE
I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on The Manitowoc Company Inc (NYSE:MTW) stock.
The Manitowoc Company Inc (NYSE:MTW) generated a below-average return on equity of 5.27% in the past 12 months, while its industry returned 11.36%. MTW’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on MTW’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of MTW’s returns. Let me show you what I mean by this. Check out our latest analysis for Manitowoc Company
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Manitowoc Company’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Manitowoc Company’s cost of equity is 10.48%. Since Manitowoc Company’s return does not cover its cost, with a difference of -5.22%, this means its current use of equity is not efficient and not sustainable. Very simply, Manitowoc Company pays more for its capital than what it generates in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Manitowoc Company can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Manitowoc Company’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a sensible 40.06%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Manitowoc Company’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Manitowoc Company’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Manitowoc Company, I’ve put together three key factors you should further examine:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Manitowoc Company worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Manitowoc Company is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Manitowoc Company? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
