Martin Marietta Materials (NYSE:MLM) has had a rough three months with its share price down 8.0%. 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. Specifically, we decided to study Martin Marietta Materials’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Martin Marietta Materials
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Martin Marietta Materials is:
23% = US$2.1b ÷ US$8.8b (Based on the trailing twelve months to June 2024).
The ‘return’ refers to a company’s earnings over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.23 in profit.
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. 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.
First thing first, we like that Martin Marietta Materials has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 15% which is quite remarkable. So, the substantial 24% net income growth seen by Martin Marietta Materials over the past five years isn’t overly surprising.
Next, on comparing Martin Marietta Materials’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 22% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for MLM? You can find out in our latest intrinsic value infographic research report.
