Weak Financial Prospects Seem To Be Dragging Down Medtronic plc (NYSE:MDT) Stock

With its stock down 4.5% over the past month, it is easy to disregard Medtronic (NYSE:MDT). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on Medtronic's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

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 Medtronic is:

9.7% = US$4.7b ÷ US$48b (Based on the trailing twelve months to July 2025).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.10 in profit.

View our latest analysis for Medtronic

What Has ROE Got To Do With 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. 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.

Medtronic's Earnings Growth And 9.7% ROE

On the face of it, Medtronic's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 11%. Still, Medtronic has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that Medtronic's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.NYSE:MDT Past Earnings Growth October 31st 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MDT worth today? The intrinsic value infographic in our free research report helps visualize whether MDT is currently mispriced by the market.

Story Continues

Is Medtronic Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 87% (implying that the company keeps only 13% of its income) of its business to reinvest into its business), most of Medtronic's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Medtronic has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 47% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 16%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Medtronic. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

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