Declining Stock and Solid Fundamentals: Is The Market Wrong About Mitie Group plc (LON:MTO)?

With its stock down 9.8% over the past three months, it is easy to disregard Mitie Group (LON:MTO). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Mitie Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for ROE is:

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

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

25% = UK£108m ÷ UK£428m (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.25 in profit.

See our latest analysis for Mitie Group

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.

Mitie Group's Earnings Growth And 25% ROE

First thing first, we like that Mitie Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 7.3% also doesn't go unnoticed by us. So, the substantial 41% net income growth seen by Mitie Group over the past five years isn't overly surprising.

We then compared Mitie Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. What is MTO worth today? The intrinsic value infographic in our free research report helps visualize whether MTO is currently mispriced by the market.

Is Mitie Group Using Its Retained Earnings Effectively?

The three-year median payout ratio for Mitie Group is 45%, which is moderately low. The company is retaining the remaining 55%. By the looks of it, the dividend is well covered and Mitie Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Mitie 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 35% over the next three years. The fact that the company's ROE is expected to rise to 33% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we are quite pleased with Mitie Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.