With its stock down 20% over the past month, it is easy to disregard Middlesex Water (NASDAQ:MSEX). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company’s key financial indicators. In this article, we decided to focus on Middlesex Water’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Middlesex Water
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Middlesex Water is:
9.3% = US$41m ÷ US$444m (Based on the trailing twelve months to September 2024).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.
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.
On the face of it, Middlesex Water’s ROE is not much to talk about. However, its ROE is similar to the industry average of 9.3%, so we won’t completely dismiss the company. Still, Middlesex Water has seen a flat net income growth over the past five years. Remember, the company’s ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.
As a next step, we compared Middlesex Water’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 9.9% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Middlesex Water’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
