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Meridian Energy Limited (NZSE:MEL) financials are too murky to relate to current stock price dynamics: What does the stock hold?

Meridian Energy (NZSE:MEL) stock is up 12% in the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on the ROE of Meridian Energy.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Meridian Energy

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Meridian Energy is:

6.7% = NZ$346 million ÷ NZ$5.1 billion (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. This means that for every NZ$1 of equity, the company generated a profit of NZ$0.07.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Earnings growth and ROE of 6.7% from Meridian Energy

At first glance, Meridian Energy’s ROE does not look very promising. Yet further investigation shows that the company’s ROE is similar to the industry average of 8.4%. That said, Meridian Energy has posted modest net income growth of 12% over the past five years. Given the slightly weak ROE, it is likely that other factors could be driving this growth. Such as – high revenue retention or effective management in place.

We then compared Meridian Energy’s net profit growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a growth rate of 10.0 % over the same period.

NZSE: MEL Past Earnings Growth March 14, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. What is MEL worth today? The intrinsic value infographic in our free research report helps visualize whether MEL is currently being mispriced by the market.

Does Meridian Energy Use Retained Earnings Effectively?

Meridian Energy has a very high three-year median payout ratio of 136%, suggesting that the company’s shareholders are paid from more than the company’s earnings. However, that didn’t really hamper his ability to grow as we saw earlier. It would always be worth keeping an eye on that high payout rate if for some reason the company runs into trouble and business goes downhill. To learn about the 2 risks we have identified for Meridian Energy, visit our risk dashboard for free.

Additionally, Meridian Energy has paid dividends over a seven-year period, which means the company is pretty serious about sharing its profits with shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 172% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change much.

Summary

All in all, we are a bit ambivalent about Meridian Energy’s performance. While there is no doubt that its earnings growth is quite strong, its ROE and earnings retention are quite poor. So while the company has managed to grow its earnings despite this, we are not confident that this growth can be sustained, particularly in times of turmoil. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.