It’s hard to get excited after looking at the recent performance of Mensch und Maschine Software (ETR: MUM), as its stock has fallen 5.3% in the past three months. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we have decided to focus on the ROE of Mensch und Maschine Software.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Mensch und Maschine Software
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Mensch und Maschine Software is:
27% = 22 million euros ÷ 82 million euros (based on the last twelve months up to June 2021).
The “return” is the annual profit. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.27 in profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Growth in profits of Mensch und Maschine Software and 27% of ROE
First, we recognize that Mensch und Maschine Software has a significantly high ROE. Second, even compared to the industry average of 16%, the company’s ROE is quite impressive. Thus, the substantial 26% net income growth observed by Mensch und Maschine Software over the past five years is not too surprising.
Then comparing with the growth in net income of the industry, we found that the growth of Mensch und Maschine Software is quite high compared to the industry average growth of 17% during the same period, this which is great to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. What is MUM worth today? The intrinsic value infographic in our free research report helps to visualize whether MUM is currently being poorly valued by the market.
Is Mensch und Maschine Software Efficiently Reinvesting Its Profits?
The high median payout rate of 78% over three years (implying it only keeps 22% of profits) for Mensch und Maschine Software suggests that the growth of the company has not been really hampered despite the return. of most of the profits to its shareholders.
In addition, Mensch und Maschine Software is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 74% of its profits over the next three years.
Overall, we are quite happy with the performance of Mensch und Maschine Software. In particular, its high ROE is quite remarkable and also the probable explanation for the considerable growth in its profits. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. So far, we’ve only done a brief review of the company’s growth data. To better understand Mensch und Maschine Software’s past earnings growth, check out this visualization of past earnings, revenue, and cash flow.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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