Profit ratio

Myer Holdings Limited (ASX:MYR) shares slipped, but fundamentals look solid: is the market wrong?

With its stock down 36% in the past three months, it’s easy to overlook Myer Holdings (ASX: MYR). However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. Specifically, we decided to study the ROE of Myer Holdings in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Myer Holdings

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Myer Holdings is:

14% = AU$36 million ÷ AU$264 million (based on trailing 12 months to January 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every Australian dollar of equity, the company generated a profit of 0.14 Australian dollars.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Myer Holdings earnings growth and ROE of 14%

At first glance, Myer Holdings appears to have a decent ROE. Regardless, the company’s ROE is still well below the industry average of 20%. However, we are pleased to see the impressive 26% net income growth recorded by Myer Holdings over the past five years. Hence, there could be other causes behind this growth. For example, the business has a low payout ratio or is efficiently managed. However, it’s worth remembering that the company has a decent ROE to start with, just that it’s below the industry average. So that certainly provides some context to the strong earnings growth the company is seeing.

Then, when comparing with industry net income growth, we found that the growth figure reported by Myer Holdings compares quite favorably to the industry average, which shows a decline of 0.5% over the of the same period.

ASX: MYR Past Earnings Growth June 29, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Myer Holdings’ valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Is Myer Holdings Reinvesting Profits Effectively?

Myer Holdings’ three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company retains 75% of its profits. So it looks like management is massively reinvesting earnings to grow their business, which is reflected in their earnings growth.

Also, Myer Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 64% over the next three years. However, Myer Holdings’ future ROE is expected to reach 17% despite the company’s expected increase in payout ratio. We infer that there could be other factors that could be driving the company’s anticipated ROE growth.

Conclusion

Overall, we are quite satisfied with the performance of Myer Holdings. Specifically, we like that he reinvested a large portion of his profits at a moderate rate of return, which resulted in increased profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.