Macquarie Telecom Group Limited's (ASX:MAQ) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Macquarie Telecom Group's (ASX:MAQ) stock is up by a considerable 53% 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. Particularly, we will be paying attention to Macquarie Telecom Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Macquarie Telecom Group

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Macquarie Telecom Group is:

13% = AU$15m ÷ AU$114m (Based on the trailing twelve months to December 2019).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Macquarie Telecom Group's Earnings Growth And 13% ROE

To begin with, Macquarie Telecom Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 12%. This probably goes some way in explaining Macquarie Telecom Group's significant 44% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Macquarie Telecom Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Macquarie Telecom Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Macquarie Telecom Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 64% (implying that it keeps only 36% of profits) for Macquarie Telecom Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Our latest analyst data shows that the future payout ratio of the company is expected to drop to 13% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

In total, we are pretty happy with Macquarie Telecom Group'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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