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Are ManpowerGroup Inc.’s (NYSE:MAN) mixed financials the reason for its dismal stock market performance?
With its shares falling 5.3% last week, it’s easy to write ManpowerGroup (NYSE:MAN) off. It appears that the market may have completely ignored the positive aspects of the company’s fundamentals and decided to weigh more on the negative aspects. Fundamentals often dictate market outcomes, so it makes sense to study company financials. Specifically, we decided to study Manpower Group ROE in this article.
Return on equity or ROE is a fundamental measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
See our latest ManpowerGroup analysis
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, ManpowerGroup’s ROE is:
2.3% = US$51m ÷ US$2.2b (Based on trailing twelve months to March 2024).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of equity capital it has, the company made $0.02 in profit.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
ManpowerGroup earnings growth and ROE of 2.3%
It’s hard to argue that ManpowerGroup’s ROE is very good on its own. Even when compared to the industry average of 14%, the ROE figure is quite disappointing. Given the circumstances, the significant decline in net profit of 13% seen by ManpowerGroup over the past five years is not surprising. However, there may also be other factors that cause yields to decline. Such as – low profit retention or poor capital allocation.
That said, we compared ManpowerGroup’s performance to the industry and were concerned when we discovered that although the company decreased its profits, the industry grew its profits at a rate of 11% over the same 5-year period.
past profit growth
Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This helps them determine whether the stock is poised for a bright or bleak future. Is ManpowerGroup fairly valued compared to other companies? Those 3 assessment measures can help you decide.
The story continues
Is ManpowerGroup reinvesting its profits efficiently?
Looking at its three-year average payout ratio of 39% (or a 61% retention ratio), which is quite normal, ManpowerGroup’s earnings decline is quite disconcerting as one would expect to see good growth when a company is retaining a good part of its profits. So there could be other factors at play here that could be hindering growth. For example, the business faced some headwinds.
Furthermore, ManpowerGroup has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 38%. Still, forecasts suggest that ManpowerGroup’s future ROE will increase to 16%, although the company’s payout ratio is not expected to change much.
Summary
Overall, we have mixed feelings about ManpowerGroup. Although it appears to be retaining most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Low earnings growth suggests our theory is correct. That said, analyzing current analyst estimates, we find that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.