Micron Technology’s (NASDAQ:MU) stock is up by a considerable 21% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. In this article, we decided to focus on Micron Technology’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Micron Technology
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Micron Technology is:
3.4% = US$1.6b ÷ US$47b (Based on the trailing twelve months to March 2023).
The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.
Why Is ROE Important For 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 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 Micron Technology’s Earnings Growth And 3.4% ROE
It is hard to argue that Micron Technology’s ROE is much good in and of itself. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 18% seen by Micron Technology over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
That being said, we compared Micron Technology’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 33% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Micron Technology’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Micron Technology Efficiently Re-investing Its Profits?
Micron Technology’s low three-year median payout ratio of 4.7% (implying that it retains the remaining 95% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company’s business may be deteriorating.
Only recently, Micron Technology stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 8.8% over the next three years. Still, forecasts suggest that Micron Technology’s future ROE will rise to 13% even though the the company’s payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company’s ROE.
On the whole, we feel that the performance shown by Micron Technology can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
What are the risks and opportunities for Micron Technology?
Earnings are forecast to grow 46.38% per year
Significant insider selling over the past 3 months
Profit margins (7%) are lower than last year (28.9%)
View all Risks and Rewards
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.