Is Mips AB (publ)'s (STO:MIPS) Latest Stock Performance A Reflection Of Its Financial Health?

Mips' (STO:MIPS) stock is up by a considerable 29% over the past month. 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. In this article, we decided to focus on Mips' ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Mips

How Do You Calculate Return On Equity?

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 Mips is:

28% = kr175m ÷ kr626m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SEK1 of shareholders' capital it has, the company made SEK0.28 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Mips' Earnings Growth And 28% ROE

Firstly, we acknowledge that Mips has a significantly high ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. Under the circumstances, Mips' considerable five year net income growth of 41% was to be expected.

We then performed a comparison between Mips' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 37% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Mips''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mips Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 62% (implying that it keeps only 38% of profits) for Mips suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Mips has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. 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 65%. However, Mips' ROE is predicted to rise to 41% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Mips' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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.