Could The Market Be Wrong About Meta Platforms, Inc. (NASDAQ:META) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Meta Platforms' (NASDAQ:META) recent performance, when its stock has declined 9.0% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Meta Platforms' ROE today.

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 Meta Platforms

How Do You Calculate Return On Equity?

Return on equity 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 Meta Platforms is:

31% = US$46b ÷ US$150b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.31.

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.

A Side By Side comparison of Meta Platforms' Earnings Growth And 31% ROE

First thing first, we like that Meta Platforms has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 7.4% also doesn't go unnoticed by us. This probably laid the groundwork for Meta Platforms' moderate 11% net income growth seen over the past five years.

We then compared Meta Platforms' 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 7.6% in the same 5-year 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). This then helps them determine if the stock is placed for a bright or bleak future. Is META fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Meta Platforms Using Its Retained Earnings Effectively?

Meta Platforms has a low three-year median payout ratio of 2.8%, meaning that the company retains the remaining 97% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 9.2% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 23%) over the same period.

Summary

In total, we are pretty happy with Meta Platforms' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.