MACOM Technology Solutions Holdings Inc. (NASDAQ:MTSI) has had a tough month, with its share price falling 10%. However, if you look closely, you might find that its key financial metrics are looking pretty strong. This could mean that the share price has the potential to rise in the long term, given that the market typically values ​​stronger long-term fundamentals. Specifically, in this article we decided to look at MACOM Technology Solutions Holdings’ ROE.
Return on Equity (ROE) is a measure of how effectively a company is growing its value and managing investors’ money. Simply put, it measures a company’s profitability relative to shareholder’s capital.
View our latest analysis for MACOM Technology Solutions Holdings
How do you calculate return on equity?
The formula for return on equity is:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, the ROE for MACOM Technology Solutions Holdings is:
6.1% = US$64m ÷ US$1b (Based on the trailing 12 months to March 2024).
“Returns” refers to the profit a company has made over the past year. One way to conceptualize this is that for every $1 of shareholders’ capital, the company made $0.06 in profit.
What is the relationship between ROE and profit growth?
We’ve already mentioned that ROE serves as an efficient profit-generating indicator to predict a company’s future earnings. Next, we need to evaluate how much of its profits the company reinvests or “retains” for future growth. This gives us an idea about the company’s growth potential. Assuming all else remains constant, the higher the ROE and retained earnings, the better a company’s growth rate will be compared to companies that don’t necessarily have these characteristics.
MACOM Technology Solutions Holdings’ Revenue Growth and 6.1% ROE
At first glance, MACOM Technology Solutions Holdings’s ROE isn’t much to talk about. A quicker inspection reveals that the company’s ROE also compares poorly to the industry average of 15%. Despite this, MACOM Technology Solutions Holdings has managed to grow its net income at a significant 65% growth rate over the past five years. Therefore, there could be other aspects that are positively impacting the company’s earnings growth. For example, the company’s management could have made good strategic decisions, or the company’s dividend payout ratio could be low.
As a next step, we compared MACOM Technology Solutions Holdings’s net income growth with the industry, and we’re pleased to find that the company’s growth is above the industry average of 30%.
NasdaqGS:MTSI Historical Revenue Growth July 29, 2024
The yardstick for valuing a company is heavily tied to its earnings growth rate. Investors need to see if the expected growth or decline in earnings (in either case) is priced in. This will help them gauge whether the stock’s future is bright or bleak. If you’re in doubt about MACOM Technology Solutions Holdings’ valuation, check out this metric of its price-to-earnings ratio compared to its industry.
Is MACOM Technology Solutions Holdings reinvesting its profits efficiently?
As MACOM Technology Solutions Holdings doesn’t pay regular dividends to shareholders, we can assume that the company reinvests all of its profits into expanding its business.
Conclusion
Overall, there seem to be some positives about MACOM Technology Solutions Holdings’ business. Despite its low return on investment, the company has recorded impressive earnings growth as a result of heavily reinvesting in the business. That said, current analyst forecasts suggest that the company’s earnings growth is expected to slow. To know more about the company’s future earnings growth forecasts, take a look at this free report on analyst forecasts for the company.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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