Is The Market Rewarding MAPFRE Middlesea p.l.c. (MTSE:MMS) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at MAPFRE Middlesea's (MTSE:MMS) recent performance, when its stock has declined 19% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to MAPFRE Middlesea'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 MAPFRE Middlesea is:

9.8% = €18m ÷ €184m (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.10.

Check out our latest analysis for MAPFRE Middlesea

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. 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.

MAPFRE Middlesea's Earnings Growth And 9.8% ROE

On the face of it, MAPFRE Middlesea's ROE is not much to talk about. Next, when compared to the average industry ROE of 13%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 4.9% seen by MAPFRE Middlesea over the past five years could probably be the result of the low ROE.

We then performed a comparison between MAPFRE Middlesea's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 6.1% in the same 5-year period.

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 MMS worth today? The intrinsic value infographic in our free research report helps visualize whether MMS is currently mispriced by the market.

Is MAPFRE Middlesea Efficiently Re-investing Its Profits?

MAPFRE Middlesea has a three-year median payout ratio of 58% (implying that it keeps only 42% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Additionally, MAPFRE Middlesea 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.

Conclusion

On the whole, we feel that the performance shown by MAPFRE Middlesea can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for MAPFRE Middlesea.

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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.