Modine Manufacturing Company (NYSE:MOD) stock has shown weakness lately, but the financial outlook looks ok: is the market wrong?

With its stock down 26% in the past three months, it’s easy to overlook Modine Manufacturing (NYSE:MOD). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will be paying attention to Modine Manufacturing’s ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Modine Manufacturing

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Modine Manufacturing is:

14% = $63 million ÷ $438 million (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.14.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Modine Manufacturing and ROE profit growth of 14%

At first glance, Modine Manufacturing appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 9.6%. Needless to say, we are quite surprised to see that Modine Manufacturing’s net income has declined by 55% over the past five years. Therefore, there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

However, when we compared the growth of Modine Manufacturing with the industry, we found that although company profits declined, the industry saw profit growth of 5.7% over the same period. It’s quite worrying.

NYSE: MOD Past Earnings Growth April 7, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is the MOD valued enough? This intrinsic business value infographic has everything you need to know.

Is Modine Manufacturing effectively using its retained earnings?

Modine Manufacturing pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other explanations for this. For example, the company’s business may deteriorate.

Summary

All in all, it seems that Modine Manufacturing has positive aspects for its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

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