Is MGE Energy, Inc.'s (NASDAQ:MGEE) Latest Stock Performance Being Led By Its Strong Fundamentals?

By
Simply Wall St
Published
July 12, 2021
NasdaqGS:MGEE
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MGE Energy's (NASDAQ:MGEE) stock up by 5.0% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study MGE Energy's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for MGE Energy

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for MGE Energy is:

10% = US$101m ÷ US$998m (Based on the trailing twelve months to March 2021).

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 $0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

MGE Energy's Earnings Growth And 10% ROE

At first glance, MGE Energy seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. This certainly adds some context to MGE Energy's moderate 5.1% net income growth seen over the past five years.

As a next step, we compared MGE Energy's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 5.6% in the same period.

past-earnings-growth
NasdaqGS:MGEE Past Earnings Growth July 12th 2021

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 MGE Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MGE Energy Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for MGE Energy suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, MGE Energy 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.

Summary

In total, we are pretty happy with MGE Energy's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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. 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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