Microchip Technology (NASDAQ:MCHP) has been doing well on the stock market, with its shares up a significant 9.2% over the past month. Considering the company's impressive performance, we decided to take a closer look at its financial metrics, as a company's financial health over the long term usually drives market results. In this article, we decided to focus on Microchip Technology's ROE.
Return on equity or ROE is a key measure used to evaluate how efficiently a company's management is utilizing the company's capital. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis on Microchip Technology.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Microchip Technology is:
33% = USD 2.4 billion ÷ USD 7.1 billion (based on trailing 12 months to December 2023).
“Revenue” is the income a company has earned over the past year. Another way to think of it is that for every $1 worth of stock, the company was able to earn him $0.33 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
Microchip Technology's earnings growth and ROE of 33%
First of all, we like Microchip Technology's impressive ROE. Secondly, we can't ignore the comparison to the average ROE of 14% reported by the industry. As a result, the exceptional 43% growth in Microchip Technology's net income over the past five years is no surprise.
We then compared Microchip Technology's net income growth rate to its industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 29%.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. Is the market factoring in MCHP's future prospects? Find out in our latest Intrinsic Value infographic research report.
Is microchip technology making efficient use of its profits?
Microchip Technology's median three-year dividend payout ratio is quite modest at 37%, which means the company retains 63% of its income. Therefore, Microchip Technology appears to be delivering impressive growth in earnings (as mentioned above) and reinvesting them efficiently in a way that pays well-covered dividends.
Additionally, Microchip Technology is determined to continue sharing its profits with shareholders, as inferred by its long history of paying dividends for at least 10 years. We checked the latest analyst consensus data and found that the company is expected to continue paying out around 38% of its profit over the next three years. Therefore, the prediction is that Microchip Technology's future ROE will be 39%, which will also be similar to his current ROE.
summary
Overall, we feel Microchip Technology is doing very well. In particular, it's great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. Having said that, we researched the latest analyst forecasts and found that while the company's past earnings have grown, analysts expect future earnings to contract. If you want to know the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
