It is hard to get excited after looking at Meta Platforms’ (NASDAQ:META) recent performance, when its stock has declined 5.7% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Meta Platforms’ ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Meta Platforms

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Meta Platforms is:

34% = US$56b ÷ US$165b (Based on the trailing twelve months to September 2024).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.34 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

A Side By Side comparison of Meta Platforms’ Earnings Growth And 34% ROE

To begin with, Meta Platforms has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 7.5% the company’s ROE is quite impressive. This probably laid the groundwork for Meta Platforms’ moderate 14% net income growth seen over the past five years.

Next, on comparing Meta Platforms’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 13% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for META? You can find out in our latest intrinsic value infographic research report.

Is Meta Platforms Using Its Retained Earnings Effectively?

In Meta Platforms’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 5.0% (or a retention ratio of 95%), which suggests that the company is investing most of its profits to grow its business.

While Meta Platforms has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 8.0% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 22%, over the same period.

Conclusion

On the whole, we feel that Meta Platforms’ performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.