Merit Medical Systems, Inc.’s (NASDAQ:MMSI) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

editorial-team@simplywallst.com (Simply Wall St)

Tue, Apr 8, 2025, 1:41 PM 3 min read

It is hard to get excited after looking at Merit Medical Systems’ (NASDAQ:MMSI) recent performance, when its stock has declined 12% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Merit Medical Systems’ ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

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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 Merit Medical Systems is:

8.7% = US$120m ÷ US$1.4b (Based on the trailing twelve months to December 2024).

The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.

Check out our latest analysis for Merit Medical Systems

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 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.

When you first look at it, Merit Medical Systems’ ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 12%, the company’s ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Merit Medical Systems saw an exceptional 51% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Merit Medical Systems’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.