Magna International’s (TSE:MG) stock is up by 9.6% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company’s financials don’t look very promising. Specifically, we decided to study Magna International’s 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.
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 Magna International is:
10.0% = US$1.3b ÷ US$13b (Based on the trailing twelve months to June 2025).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders’ capital it has, the company made CA$0.10 in profit.
View our latest analysis for Magna International
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
At first glance, Magna International’s ROE doesn’t look very promising. Yet, a closer study shows that the company’s ROE is similar to the industry average of 9.4%. We can see that Magna International has grown at a five year net income growth average rate of 4.5%, which is a bit on the lower side. Bear in mind, the company’s ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.
We then compared Magna International’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 7.8% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is MG fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
The high three-year median payout ratio of 54% (that is, the company retains only 46% of its income) over the past three years for Magna International suggests that the company’s earnings growth was lower as a result of paying out a majority of its earnings.
Moreover, Magna International has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 28% over the next three years. As a result, the expected drop in Magna International’s payout ratio explains the anticipated rise in the company’s future ROE to 13%, over the same period.
On the whole, Magna International’s performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.