Has Masimo Corporation's (NASDAQ:MASI) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
July 13, 2021
NasdaqGS:MASI
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Masimo (NASDAQ:MASI) has had a great run on the share market with its stock up by a significant 17% 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. Specifically, we decided to study Masimo's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Masimo

How Is ROE Calculated?

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 Masimo is:

17% = US$229m ÷ US$1.3b (Based on the trailing twelve months to April 2021).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.17.

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. 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.

A Side By Side comparison of Masimo's Earnings Growth And 17% ROE

To start with, Masimo's ROE looks acceptable. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. Despite this, Masimo's five year net income growth was quite low averaging at only 3.5%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Masimo'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 14% in the same period.

past-earnings-growth
NasdaqGS:MASI Past Earnings Growth July 13th 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Masimo's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Masimo Using Its Retained Earnings Effectively?

Conclusion

On the whole, we do feel that Masimo has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. 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. 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.
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