Stock Futures – Mainfreight Limited’s (NZSE:MFT) Stock’s On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Mainfreight’s (NZSE:MFT) stock increased significantly by 25% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Mainfreight’s ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Mainfreight

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 Mainfreight is:

17% = NZ$173m ÷ NZ$996m (Based on the trailing twelve months to September 2020).

The ‘return’ is the yearly profit. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.17 in profit.

What Has ROE Got To Do With 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 Mainfreight’s Earnings Growth And 17% ROE

To begin with, Mainfreight seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.3%. This certainly adds some context to Mainfreight’s decent 15% net income growth seen over the past five years.

We then compared Mainfreight’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 8.7% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for MFT? You can find out in our latest intrinsic value infographic research report.

Is Mainfreight Making Efficient Use Of Its Profits?

Mainfreight has a healthy combination of a moderate three-year median payout ratio of 41% (or a retention ratio of 59%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Mainfreight is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 41%. Accordingly, forecasts suggest that Mainfreight’s future ROE will be 17% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Mainfreight’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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. 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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