Nasdaq Today – Are Strong Financials Guiding The Market?
McGrath RentCorp (NASDAQ:MGRC) has had a great run on the share market with its stock up by a significant 14% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study McGrath RentCorp’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for McGrath RentCorp
How Is ROE Calculated?
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 McGrath RentCorp is:
14% = US$99m ÷ US$688m (Based on the trailing twelve months to March 2021).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.14 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
A Side By Side comparison of McGrath RentCorp’s Earnings Growth And 14% ROE
At first glance, McGrath RentCorp seems to have a decent ROE. Especially when compared to the industry average of 10% the company’s ROE looks pretty impressive. Probably as a result of this, McGrath RentCorp was able to see a decent growth of 14% over the last five years.
As a next step, we compared McGrath RentCorp’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 12% in the same period.
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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about McGrath RentCorp’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is McGrath RentCorp Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that McGrath RentCorp is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Additionally, McGrath RentCorp 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%.
On the whole, we feel that McGrath RentCorp’s 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. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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