Melrose Industries PLC's (LON:MRO) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Melrose Industries' (LON:MRO) stock increased significantly by 8.6% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Melrose Industries' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Melrose Industries is:

11% = UK£316m ÷ UK£2.9b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.11 in profit.

View our latest analysis for Melrose Industries

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Melrose Industries' Earnings Growth And 11% ROE

To start with, Melrose Industries' ROE looks acceptable. Be that as it may, the company's ROE is still quite lower than the industry average of 15%. Still, we can see that Melrose Industries has seen a remarkable net income growth of 54% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.

We then performed a comparison between Melrose Industries' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 53% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is MRO worth today? The intrinsic value infographic in our free research report helps visualize whether MRO is currently mispriced by the market.

Is Melrose Industries Making Efficient Use Of Its Profits?

Melrose Industries' LTM (or last twelve month) payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. By the looks of it, the dividend is well covered and Melrose Industries is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Melrose Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 24%. Regardless, the future ROE for Melrose Industries is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Melrose Industries' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.