Melexis NV's (EBR:MELE) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Simply Wall St · 01/18/2024 05:57

Melexis (EBR:MELE) has had a rough month with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Melexis' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Melexis

How To Calculate Return On Equity?

ROE 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 Melexis is:

38% = €212m ÷ €553m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.38 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Melexis' Earnings Growth And 38% ROE

To begin with, Melexis has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. As a result, Melexis' exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Melexis' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 26% over the last few years.

past-earnings-growth
ENXTBR:MELE Past Earnings Growth January 18th 2024

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. Is MELE fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Melexis Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 72% (implying that it keeps only 28% of profits) for Melexis suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Melexis 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 66%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 36%.

Summary

Overall, we are quite pleased with Melexis' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.