Most readers would already be aware that Mondi’s (LON:MNDI) stock increased significantly by 13% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Mondi’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Mondi
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 Mondi is:
13% = €803m ÷ €6.1b (Based on the trailing twelve months to June 2023).
The ‘return’ is the income the business earned over the last year. So, this means that for every £1 of its shareholder’s investments, the company generates a profit of £0.13.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Mondi’s Earnings Growth And 13% ROE
At first glance, Mondi seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Despite the modest returns, Mondi’s five year net income growth was quite low, averaging at only 3.4%. So, there could be some other factors at play that could be impacting the company’s growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Mondi’s reported growth was lower than the industry growth of 8.6% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Mondi’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Mondi Efficiently Re-investing Its Profits?
While Mondi has a decent three-year median payout ratio of 41% (or a retention ratio of 59%), it has seen very little growth in earnings. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.
Additionally, Mondi 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’s future payout ratio is expected to rise to 53% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.
Summary
Overall, we feel that Mondi certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
