Is Mips AB (publ)’s (STO:MIPS) Latest Stock Performance A Reflection Of Its Financial Health?

Mips (STO:MIPS) stock is up a whopping 29% over the past month. Because the market typically pays for a company’s long-term fundamentals, we decided to examine the company’s key performance indicators to see if they could impact the market. In this article, we decided to focus on Mips’ ROE.

Return on Equity, or ROE, is a key metric used to assess how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.

Check out our latest analysis for Mips

How do you calculate return on equity?

The Formula for return on equity Is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Mips is:

28% = kr175m ÷ kr626m (Based on the trailing 12 months to December 2022).

“Yield” refers to a company’s profits over the past year. One way to conceptualize this is that for every SEK1 of shareholder capital it has, the company makes a profit of SEK0.28.

Why is ROE important for earnings growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company reinvests, or “retains,” we are then able to assess a company’s future ability to generate profits. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Mips earnings growth and 28% ROE

First, we recognize that Mips has a significantly high ROE. Second, the company’s ROE is pretty impressive even compared to the industry average of 20%. Under these circumstances, Mips’ substantial five-year net income growth of 41% was to be expected.

We then ran a comparison between Mips’ net income growth and the industry, which revealed that the company’s growth is similar to the average industry growth of 37% over the same period.

Earnings growth is an important metric to consider when evaluating 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 allows them to determine if the stock’s future looks bright or ominous. If you’re wondering about Mips’ valuation, check out this benchmark for price-to-earnings versus its industry.

Does Mips use its retained earnings effectively?

The high three-year average payout ratio of 62% (meaning Mips keeps just 38% of earnings) suggests the company’s growth hasn’t really been hampered, though it did return most of the earnings to its shareholders.

Additionally, Mips has paid dividends over a four-year period, meaning the company is pretty serious about sharing its profits with shareholders. Based on the latest analyst estimates, we have found that the company’s future payout ratio is expected to remain steady at 65% for the next three years. However, Mips’ ROE is expected to increase to 41%, although no change in payout ratio is expected.

Summary

Overall, we think Mips’ performance is quite good. We’re particularly impressed with the company’s notable earnings growth, likely helped by its high ROE. While the company pays out most of its earnings as dividends, it’s still been able to grow earnings, so that’s probably a good sign. Against this backdrop, the latest forecasts from industry analysts indicate that the company’s earnings growth is likely to slow. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.

Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.