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Are Robust Financials Driving The Recent Rally In MasterCraft Boat Holdings, Inc.'s (NASDAQ:MCFT) Stock?

MasterCraft Boat Holdings' (NASDAQ:MCFT) stock is up by a considerable 39% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on MasterCraft Boat Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for MasterCraft Boat Holdings

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for MasterCraft Boat Holdings is:

49% = US$71m ÷ US$144m (Based on the trailing twelve months to October 2022).

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 $0.49 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

MasterCraft Boat Holdings' Earnings Growth And 49% ROE

First thing first, we like that MasterCraft Boat Holdings has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 29% also doesn't go unnoticed by us. This probably laid the groundwork for MasterCraft Boat Holdings' moderate 15% net income growth seen over the past five years.

We then compared MasterCraft Boat Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 34% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

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. Is MCFT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is MasterCraft Boat Holdings Using Its Retained Earnings Effectively?

Given that MasterCraft Boat Holdings doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, we are pretty happy with MasterCraft Boat Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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