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

Most readers would already be aware that MAHLE Metal Leve's (BVMF:LEVE3) stock increased significantly by 8.0% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to MAHLE Metal Leve's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for MAHLE Metal Leve

How To Calculate Return On Equity?

Return on equity 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:

69% = R$762m ÷ R$1.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.69 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 69% ROE

First thing first, we like that MAHLE Metal Leve has an impressive ROE. Secondly, even when compared to the industry average of 8.8% the company's ROE is quite impressive. So, the substantial 29% net income growth seen by MAHLE Metal Leve over the past five years isn't overly surprising.

As a next step, we compared MAHLE Metal Leve'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 14%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is MAHLE Metal Leve fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MAHLE Metal Leve Making Efficient Use Of Its Profits?

MAHLE Metal Leve has a significant three-year median payout ratio of 95%, meaning the company only retains 4.9% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, MAHLE Metal Leve is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 93%. As a result, MAHLE Metal Leve's ROE is not expected to change by much either, which we inferred from the analyst estimate of 59% for future ROE.

Conclusion

In total, it does look like MAHLE Metal Leve has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com