Is Weakness In Metlen Energy & Metals S.A. (ATH:MYTIL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 4.8% over the past month, it is easy to disregard Metlen Energy & Metals (ATH:MYTIL). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Metlen Energy & Metals' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Metlen Energy & Metals

How To Calculate Return On Equity?

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 Metlen Energy & Metals is:

23% = €626m ÷ €2.7b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.23 in profit.

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Metlen Energy & Metals' Earnings Growth And 23% ROE

Firstly, we acknowledge that Metlen Energy & Metals has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.0% which is quite remarkable. Under the circumstances, Metlen Energy & Metals' considerable five year net income growth of 37% was to be expected.

As a next step, we compared Metlen Energy & Metals' 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. 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. If you're wondering about Metlen Energy & Metals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Metlen Energy & Metals Using Its Retained Earnings Effectively?

The three-year median payout ratio for Metlen Energy & Metals is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Metlen Energy & Metals is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Metlen Energy & Metals is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. 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 34%. Accordingly, forecasts suggest that Metlen Energy & Metals' future ROE will be 21% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Metlen Energy & Metals' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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

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