Should Weakness in Mayr-Melnhof Karton AG's (VIE:MMK) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 8.2% over the past three months, it is easy to disregard Mayr-Melnhof Karton (VIE:MMK). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Mayr-Melnhof Karton's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Mayr-Melnhof Karton

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 Mayr-Melnhof Karton is:

11% = €174m ÷ €1.6b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Mayr-Melnhof Karton's Earnings Growth And 11% ROE

At first glance, Mayr-Melnhof Karton seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Mayr-Melnhof Karton's decent returns aren't reflected in Mayr-Melnhof Karton'smediocre five year net income growth average of 2.1%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Mayr-Melnhof Karton's reported growth was lower than the industry growth of 7.8% in the same period, which is not something we like to see.

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. If you're wondering about Mayr-Melnhof Karton's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mayr-Melnhof Karton Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 38% (implying that the company retains the remaining 62% of its income), Mayr-Melnhof Karton's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Mayr-Melnhof Karton has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Still, forecasts suggest that Mayr-Melnhof Karton's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Mayr-Melnhof Karton has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.