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Middleby (NASDAQ:MIDD) has had a rough three months with its share price down 17%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Middleby'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Middleby
How To Calculate Return On Equity?
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 Middleby is:
15% = US$454m ÷ US$3.0b (Based on the trailing twelve months to July 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.15 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Middleby's Earnings Growth And 15% ROE
At first glance, Middleby seems to have a decent ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. This certainly adds some context to Middleby's moderate 10.0% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Middleby's growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Middleby's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Middleby Efficiently Re-investing Its Profits?
Given that Middleby doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.