With its stock down 11% over the past week, it’s easy to disregard Maui Land & Pineapple Company (NYSE:MLP). However, stock prices are usually driven by a company’s financials over the long term, which in this case looks pretty respectable. In this article, we decided to focus on Maui Land & Pineapple Company’s ROE.

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 Maui Land & Pineapple Company

How Do You Calculate Return On Equity?

the formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Maui Land & Pineapple Company is:

16% = US$5.6m ÷ US$35m (Based on the trailing twelve months to September 2022).

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 $0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Maui Land & Pineapple Company’s Earnings Growth And 16% ROE

At first glance, Maui Land & Pineapple Company seems to have a decent ROE. Even when compared to the industry average of 15%, the company’s ROE looks quite decent. However, while Maui Land & Pineapple Company has a pretty respectable ROE, its five year net income decline rate was 29%. We reckon that there could be some other factors at play here that are preventing the company’s growth. These include low earnings retention or poor allocation of capital.

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That being said, we compared Maui Land & Pineapple Company’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 21% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Maui Land & Pineapple Company is trading on a high P/E or a low P/E, relative to its industry.

Is Maui Land & Pineapple Company Efficiently Re-investing Its Profits?

Because Maui Land & Pineapple Company doesn’t pay any dividends, we infer that it is retaining all of its profits, which is rather a perplexing when you consider the fact that there is no earnings growth to show for it. So there could be some other explanations in that regard. For example, the company’s business may be deteriorating.

Summary

Overall, we feel that Maui Land & Pineapple Company certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Maui Land & Pineapple Company by visiting us risks dashboard for free on our platform here.

Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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