With its stock down 9.6% over the past three months, it is easy to disregard Minerals Technologies (NYSE:MTX). It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. In this article, we decided to focus on Minerals Technologies’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Return on equity can be calculated by using the formula:
So, based on the above formula, the ROE for Minerals Technologies is:
5.4% = US$91m ÷ US$1.7b (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 $0.05.
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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
When you first look at it, Minerals Technologies’ ROE doesn’t look that attractive. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.6%. Therefore, it might not be wrong to say that the five year net income decline of 7.8% seen by Minerals Technologies was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
So, as a next step, we compared Minerals Technologies’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% over the last few years.
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. Doing so will help them establish if the stock’s future looks promising or ominous. What is MTX worth today? The intrinsic value infographic in our free research report helps visualize whether MTX is currently mispriced by the market.
Is Minerals Technologies Using Its Retained Earnings Effectively?
Minerals Technologies’ low three-year median payout ratio of 5.4% (or a retention ratio of 95%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company’s earnings have actually shrunk. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.
Additionally, Minerals Technologies has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 5.5% of its profits over the next three years. Still, forecasts suggest that Minerals Technologies’ future ROE will rise to 13% even though the the company’s payout ratio is not expected to change by much.
In total, we’re a bit ambivalent about Minerals Technologies’ performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.…Read more by editorial-team@simplywallst.com (Simply Wall St)
