With its stock down 12% over the past month, it is easy to disregard Meta Platforms (NASDAQ:META). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Meta Platforms’ ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Meta Platforms
How Is ROE Calculated?
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 Meta Platforms is:
33% = US$51b ÷ US$157b (Based on the trailing twelve months to June 2024).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.33 in profit.
What Has ROE Got To Do With 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 then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Meta Platforms’ Earnings Growth And 33% ROE
To begin with, 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 paved the way for the modest 13% net income growth seen by Meta Platforms over the past five years.
We then compared Meta Platforms’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 4.7% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is META fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Meta Platforms Making Efficient Use Of Its Profits?
In Meta Platforms’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 3.9% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.
While Meta Platforms has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 9.2% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 22%) over the same period.
Summary
In total, we are pretty happy with Meta Platforms’ 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 substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected be similar to its current growth rate. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com