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Does The Market Have A Low Tolerance For Mesa Royalty Trust's (NYSE:MTR) Mixed Fundamentals?

Simply Wall St · 2d ago

Mesa Royalty Trust (NYSE:MTR) has had a rough three months with its share price down 27%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Mesa Royalty Trust's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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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How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Mesa Royalty Trust is:

14% = US$428k ÷ US$3.2m (Based on the trailing twelve months to September 2025).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.14.

View our latest analysis for Mesa Royalty Trust

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Mesa Royalty Trust's Earnings Growth And 14% ROE

At first glance, Mesa Royalty Trust seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Yet, Mesa Royalty Trust has posted measly growth of 2.2% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Mesa Royalty Trust's reported growth was lower than the industry growth of 24% over the last few years, which is not something we like to see.

past-earnings-growth
NYSE:MTR Past Earnings Growth December 23rd 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Mesa Royalty Trust's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mesa Royalty Trust Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 97% (or a retention ratio of 2.9%), most of Mesa Royalty Trust's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Mesa Royalty Trust 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.

Conclusion

Overall, we have mixed feelings about Mesa Royalty Trust. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Mesa Royalty Trust visit our risks dashboard for free.