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Should potential shareholders take the leap?
It’s hard to get excited after looking at the recent performance of Meta Platforms (NASDAQ:META), when its shares fell 6.1% last month. But if we pay close attention, we might conclude that its solid financial position could mean that the shares could potentially see a long-term increase in value, given the way markets typically reward companies in good financial health. In this article, we decided to focus on Metaplatforms’ ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. Put another way, it reveals the company’s success in transforming shareholder investments into profits.
Check out our latest analysis for Meta Platforms
How is ROE calculated?
O formula for ROE It is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Therefore, based on the above formula, the ROE for Meta Platforms is:
31% = US$46 billion ÷ US$150 billion (based on trailing twelve months to March 2024).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of this is that for every $1 of equity, the company was able to make $0.31 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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we will then be able to assess a company’s earnings growth potential. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Meta Platforms earnings growth and ROE of 31%
For starters, Meta Platforms has a pretty high ROE, which is interesting. Secondly, even when compared to the industry average of 7.4%, the company’s ROE is quite impressive. This likely laid the groundwork for Meta Platforms’ moderate 11% net profit growth seen over the past five years.
Next, when comparing this to the industry’s net profit growth, we find that Meta Platforms’ growth is quite high when compared to the industry average growth of 6.0% over the same period, which is great to see.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. Doing so will give you an idea of whether the action is heading towards clear blue waters or if swampy waters await. Is META valued fairly? That infographic about the intrinsic value of the company It has everything you need to know.
The story continues
Are metaplatforms using their retained profits effectively?
Meta Platforms’ three-year average shareholder payout ratio is 2.8% (implying that it retains 97% of its income), which is lower, so it appears that management is heavily reinvesting profits to grow your business.
Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 9.2% over the next three years. Therefore, the expected increase in the payout ratio explains why the company’s ROE is expected to decrease to 23% over the same period.
Conclusion
Overall, we feel that Meta Platforms’ performance has been very good. Specifically, we like that the company is reinvesting a large portion of its profits at a high rate of return. Of course, this caused the company to record substantial growth in its profits. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page 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.