MAHLE Metal Leve S.A.'s (BVMF:LEVE3) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

MAHLE Metal Leve (BVMF:LEVE3) has had a great run on the share market with its stock up by a significant 11% 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. Particularly, we will be paying attention to MAHLE Metal Leve's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for MAHLE Metal Leve

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for MAHLE Metal Leve is:

6.5% = R$86m ÷ R$1.3b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

MAHLE Metal Leve's Earnings Growth And 6.5% ROE

It is quite clear that MAHLE Metal Leve's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.6%. Thus, the low ROE certainly provides some context to MAHLE Metal Leve's very little net income growth of 4.8% seen over the past five years.

Given that the industry shrunk its earnings at a rate of 0.9% in the same period, the net income growth of the company is quite impressive.

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

Is MAHLE Metal Leve Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 86% (that is, the company retains only 14% of its income) over the past three years for MAHLE Metal Leve suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, MAHLE Metal Leve 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 84% of its profits over the next three years. Regardless, the future ROE for MAHLE Metal Leve is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that MAHLE Metal Leve certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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. 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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