Is Mensch und Maschine Software SE's (ETR:MUM) Latest Stock Performance A Reflection Of Its Financial Health?

Mensch und Maschine Software's's (ETR:MUM) stock is up by a considerable 21% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Mensch und Maschine Software's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Mensch und Maschine Software

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Mensch und Maschine Software is:

26% = €20m ÷ €78m (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.26.

Why Is ROE Important For Earnings Growth?

So far, we've learnt that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Mensch und Maschine Software's Earnings Growth And 26% ROE

Firstly, we acknowledge that Mensch und Maschine Software has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. So, the substantial 31% net income growth seen by Mensch und Maschine Software over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Mensch und Maschine Software's growth is quite high when compared to the industry average growth of 6.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is MUM worth today? The intrinsic value infographic in our free research report helps visualize whether MUM is currently mispriced by the market.

Is Mensch und Maschine Software Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (implying that it keeps only 21% of profits) for Mensch und Maschine Software suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Mensch und Maschine Software has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 72%.

Conclusion

In total, we are pretty happy with Mensch und Maschine Software's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you’re looking to trade Mensch und Maschine Software, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.