Mastermyne Group Limited's (ASX:MYE) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
August 12, 2021
ASX:MYE
Source: Shutterstock

Mastermyne Group (ASX:MYE) has had a great run on the share market with its stock up by a significant 39% over the last 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 Mastermyne Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Mastermyne Group

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 Mastermyne Group is:

13% = AU$9.3m ÷ AU$72m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Mastermyne Group's Earnings Growth And 13% ROE

To begin with, Mastermyne Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. This certainly adds some context to Mastermyne Group's exceptional 64% net income growth seen over the past five years. 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.

Next, on comparing with the industry net income growth, we found that Mastermyne Group's growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.

past-earnings-growth
ASX:MYE Past Earnings Growth August 13th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mastermyne Group is trading on a high P/E or a low P/E, relative to its industry.

Is Mastermyne Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Mastermyne Group is 50%, which is moderately low. The company is retaining the remaining 50%. By the looks of it, the dividend is well covered and Mastermyne Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Mastermyne Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Mastermyne Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 4 risks we have identified for Mastermyne Group by visiting our risks dashboard for free on our platform here.

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