Stock Analysis

Mesa Royalty Trust's (NYSE:MTR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

NYSE:MTR
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With its stock down 22% over the past three months, it is easy to disregard Mesa Royalty Trust (NYSE:MTR). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Mesa Royalty Trust's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Mesa Royalty Trust

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 Mesa Royalty Trust is:

74% = US$2.3m ÷ US$3.1m (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.74 in profit.

Why Is ROE Important For 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.

Mesa Royalty Trust's Earnings Growth And 74% ROE

First thing first, we like that Mesa Royalty Trust has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. As a result, Mesa Royalty Trust's exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Mesa Royalty Trust's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 38% in the same period.

past-earnings-growth
NYSE:MTR Past Earnings Growth June 17th 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Mesa Royalty Trust fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mesa Royalty Trust Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 100% (implying that it keeps only 0.3% of profits) for Mesa Royalty Trust suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Mesa Royalty Trust has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like Mesa Royalty Trust has some positive aspects to its business. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Mesa Royalty Trust and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Valuation is complex, but we're helping make it simple.

Find out whether Mesa Royalty Trust is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

Valuation is complex, but we're helping make it simple.

Find out whether Mesa Royalty Trust is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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