Meta Platforms, Inc.'s (NASDAQ:META) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Meta Platforms' (NASDAQ:META) stock increased significantly by 12% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Meta Platforms

How To 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 Meta Platforms is:

33% = US$51b ÷ US$157b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.33.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Meta Platforms' Earnings Growth And 33% 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 7.1% also doesn't go unnoticed by us. This likely paved the way for the modest 13% net income growth seen by Meta Platforms over the past five years.

Next, on comparing with the industry net income growth, we found that Meta Platforms' growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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?

In Meta Platforms' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 3.9% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Meta Platforms only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 9.2% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 22% over the same period.

Summary

On the whole, we feel that Meta Platforms' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to 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.