Stock Analysis

Is MHM Automation Limited's(NZSE:MHM) Recent Stock Performance Tethered To Its Strong Fundamentals?

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NZSE:MHM
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MHM Automation (NZSE:MHM) has had a great run on the share market with its stock up by a significant 25% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to MHM Automation's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for MHM Automation

How Do You 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 MHM Automation is:

24% = NZ$1.1m ÷ NZ$4.9m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.24 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 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.

MHM Automation's Earnings Growth And 24% ROE

Firstly, we acknowledge that MHM Automation has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. So, the substantial 35% net income growth seen by MHM Automation over the past five years isn't overly surprising.

We then compared MHM Automation'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 17% in the same period.

past-earnings-growth
NZSE:MHM Past Earnings Growth February 22nd 2021

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about MHM Automation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MHM Automation Efficiently Re-investing Its Profits?

Conclusion

Overall, we are quite pleased with MHM Automation's 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 4 risks we have identified for MHM Automation visit our risks dashboard for free.

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