Looking at Microchip Technology’s (NASDAQ:MCHP) recent performance, it’s hard to get excited, with the share price down 5.9% over the past month. However, share prices are usually driven by a company’s long term financial performance, which in this case looks very promising. In particular, we’ll be looking at Microchip Technology’s ROE today.
Return on equity (ROE) is an important factor to consider for a shareholder because it tells them how effectively their capital is being reinvested. Put simply, ROE tells you the profit each dollar of shareholder investment generates.
Read our latest analysis for 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, Microchip Technology’s ROE is:
29% = US$1.9b / US$6.7b (Based on the trailing 12 months to March 2024).
“Revenue” is the income a company has earned over the past year, meaning that for every $1 of shareholder investment, the company will generate $0.29 in profit.
What is the relationship between ROE and profit growth?
Thus far, we have seen that ROE is a measure of how efficiently a company generates its profits. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all else being equal, companies with higher return on equity and retained profits will have higher growth rates than companies that don’t have these attributes.
Microchip Technology’s Revenue Growth and 29% ROE
First, we’ll acknowledge that Microchip Technology’s ROE is extremely high. Moreover, the company’s ROE is higher than the industry average of 15%, which is very noteworthy. Therefore, the impressive 40% increase in net income achieved by Microchip Technology over the past five years is not all that surprising.
Secondly, when we compare it with the industry’s net income growth, we can see that Microchip Technology’s growth rate is impressive, being quite high compared to the average industry growth rate of 31% during the same period.
Earnings growth is an important metric to consider when valuing a stock. It is important for investors to know whether the market has priced in the company’s expected earnings growth (or decline). This helps them determine whether the stock is poised for a bright or bleak future. What is MCHP worth today? The intrinsic value infographic in our free research report helps you visualize whether MCHP is currently undervalued by the market.
Is Microchip Technology making good use of its retained earnings?
Microchip Technology’s three-year median dividend payout ratio is 37%, which is on the low side. The company retains the remaining 63%. This suggests that the dividend is well covered. Also, given the high growth mentioned above, Microchip Technology appears to be reinvesting its earnings efficiently.
Additionally, Microchip Technology has been paying dividends for at least ten years, which means the company is pretty serious about sharing profits with shareholders. Based on the latest analyst forecasts, the company’s dividend payout ratio over the next three years is expected to remain stable at 42%. Either way, even though no major changes are expected to the dividend payout ratio, Microchip Technology’s future ROE is predicted to rise to 49%.
summary
Overall, we’re very pleased with Microchip Technology’s performance. In particular, it’s great to see the company investing heavily in its business, which coupled with strong profit margins has led to strong revenue growth. That said, the latest industry analyst forecasts suggest the company’s revenue growth is set to slow. You can find out more about the company’s future revenue growth forecasts here. free For more information, see the company’s analyst forecast report.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. 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.
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