Stock Analysis

Has MSC Industrial Direct Co., Inc.'s (NYSE:MSM) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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NYSE:MSM

MSC Industrial Direct (NYSE:MSM) has had a great run on the share market with its stock up by a significant 9.2% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to MSC Industrial Direct's ROE today.

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 MSC Industrial Direct

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 MSC Industrial Direct is:

17% = US$233m ÷ US$1.4b (Based on the trailing twelve months to November 2024).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.17 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

MSC Industrial Direct's Earnings Growth And 17% ROE

To start with, MSC Industrial Direct's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 17%. This probably goes some way in explaining MSC Industrial Direct's moderate 5.3% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that MSC Industrial Direct's reported growth was lower than the industry growth of 23% over the last few years, which is not something we like to see.

NYSE:MSM Past Earnings Growth January 23rd 2025

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for MSM? You can find out in our latest intrinsic value infographic research report.

Is MSC Industrial Direct Efficiently Re-investing Its Profits?

While MSC Industrial Direct has a three-year median payout ratio of 55% (which means it retains 45% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, MSC Industrial Direct has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 75% over the next three years. Regardless, the future ROE for MSC Industrial Direct is speculated to rise to 22% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, it does look like MSC Industrial Direct has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.