Shares of MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) are falling, but fundamentals look good: Will the market correct the stock price in the future?

MACOM Technology Solutions Holdings (NASDAQ:MTSI) has had a rough month, with its share price down 10%. But if you’re paying attention, you might notice that its key financial indicators are looking pretty strong, which could mean the stock has potential to rise in the long term, given how markets tend to reward more resilient long-term fundamentals. We specifically decided to study MACOM Technology Solutions Holdings’ ROE in this article.

Return on Equity or ROE is a test of how effectively a company grows its value and manages investors’ money. Simply put, it measures a company’s profitability relative to its shareholders’ equity.

View our latest analysis for MACOM Technology Solutions Holdings

How do you calculate return on equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for MACOM Technology Solutions Holdings is:

6.1% = US$64m ÷ US$1.0bn (based on the trailing twelve months to March 2024).

“Return” refers to a company’s profit over the past year. One way to conceptualize it is that for every $1 of shareholder equity, the company made $0.06 in profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. We now need to evaluate how much profit the company is reinvesting or “retaining” for future growth, which in turn gives us an idea of ​​the company’s growth potential. Assuming all else remains, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.

MACOM Technology Solutions Holdings Profit Growth and 6.1% ROE

At first glance, MACOM Technology Solutions Holdings’ ROE isn’t much to talk about. A quick closer look shows that the company’s ROE doesn’t compare favorably to the industry average of 15% either. Despite this, MACOM Technology Solutions Holdings has managed to grow its net income significantly, with a rate of 65% over the past five years. So, there may be other aspects that are positively influencing the company’s earnings growth. For example, the company’s management may have made some good strategic decisions or the company may have a low payout ratio.

Next, we compared MACOM Technology Solutions Holdings’ net income growth with the industry. We were pleased to see that the growth the company experienced was higher than the industry average growth of 30%.

The basis for assigning value to a company is largely tied to its earnings growth. The investor should try to determine whether the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine whether the stock is positioned for a bright or bleak future. If you are wondering what the valuation of MACOM Technology Solutions Holdings is, check out this benchmark for its price-to-earnings ratio, compared to the industry.

Does MACOM Technology Solutions Holdings reinvest its profits efficiently?

Since MACOM Technology Solutions Holdings does not pay regular dividends to its shareholders, we infer that the company has reinvested all profits to grow the business.

Conclusion

Overall, it seems that MACOM Technology Solutions Holdings has some positive aspects to its business. Even with the low returns, the company has posted impressive earnings growth as a result of reinvesting in its business. That said, the company’s earnings growth is expected to slow down, as predicted by current analyst estimates. To learn more about the company’s future earnings growth projections, check out this free report on analyst forecasts for the company to find out more.

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This article from Simply Wall St is general in nature. We comment solely on historical data and analyst forecasts, using an objective methodology. Our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. We aim to provide you with a long-term analysis driven by fundamental data. Please 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 the shares mentioned.

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