Mullen Group Ltd.'s (TSE:MTL) Dismal Stock Performance Reflects Weak Fundamentals

Mullen Group (TSE:MTL) has had a rough week with its share price down 5.6%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Mullen 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. 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 Mullen Group

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Mullen Group is:

8.1% = CA$72m ÷ CA$895m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.08 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. 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.

A Side By Side comparison of Mullen Group's Earnings Growth And 8.1% ROE

When you first look at it, Mullen Group's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 16%. Therefore, Mullen Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Mullen Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MTL worth today? The intrinsic value infographic in our free research report helps visualize whether MTL is currently mispriced by the market.

Is Mullen Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 64% (meaning, the company retains only 36% of profits) for Mullen Group suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Mullen Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 64%.

Conclusion

On the whole, Mullen Group's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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