Minerals Technologies (NYSE:MTX) has had a great run on the share market with its stock up by a significant 67% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Minerals Technologies’ ROE in this article.
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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Minerals Technologies is:
9.6% = US$136m ÷ US$1.4b (Based on the trailing twelve months to March 2020).
The ‘return’ refers to a company’s earnings over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learnt 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.
Minerals Technologies’ Earnings Growth And 9.6% ROE
When you first look at it, Minerals Technologies’ ROE doesn’t look that attractive. Yet, a closer study shows that the company’s ROE is similar to the industry average of 12%. Even so, Minerals Technologies has shown a fairly decent growth in its net income which grew at a rate of 8.4%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Minerals Technologies’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 9.3% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. What is MTX worth today? The intrinsic value infographic in our free research report helps visualize whether MTX is currently mispriced by the market.
Is Minerals Technologies Efficiently Re-investing Its Profits?
Minerals Technologies has a low three-year median payout ratio of 4.5%, meaning that the company retains the remaining 96% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Minerals Technologies has paid dividends over a period of at least ten 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 4.2%. As a result, Minerals Technologies’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.
In total, it does look like Minerals Technologies has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. Thank you for reading.