Does finance have a role to play?
MV Oil Trust (NYSE: MVO) shares have risen 24% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of MV Oil Trust.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for MV Oil Trust
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of MV Oil Trust is:
53% = US $ 4.8 million ÷ US $ 9.0 million (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made a profit of $ 0.53.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
MV Oil Trust profit growth and 53% ROE
First of all, we love that MV Oil Trust has an impressive ROE. Additionally, the company’s ROE is 12% higher than the industry average, which is quite remarkable. Yet MV Oil Trust has shown meager 4.3% growth over the past five years. This is usually not the case, because when a business has a high rate of return, it should generally also have a high rate of profit growth. We believe that low growth, when returns are high enough, could be the result of certain circumstances such as low profit retention or misallocation of capital.
Then, comparing the net income growth of MV Oil Trust with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 3.7% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you’re wondering about MV Oil Trust’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is MV Oil Trust Using Profits Efficiently?
MV Oil Trust has a three-year median payout rate of 92% (implying that it only keeps 8.4% of its profits), which means it pays out most of its profits to shareholders in the form of in dividends, and as a result, the company saw weak earnings growth.
Additionally, MV Oil Trust has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. ‘business.
All in all, it seems that MV Oil Trust has positive aspects for its business. The company increased its profits moderately due to its impressive ROE. Yet the company keeps virtually none of its profits. This could have negative implications for the future growth of the business. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 3 risks we have identified for MV Oil Trust by visiting our risk dashboard for free on our platform here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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