Palo Alto Networks, Inc. (NASDAQ:PANW) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 26% over the past month, it is easy to disregard Palo Alto Networks (NASDAQ:PANW). 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. Particularly, we will be paying attention to Palo Alto Networks’ ROE today.

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.

See our latest analysis for Palo Alto Networks

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 Palo Alto Networks is:

52% = US$2.3b ÷ US$4.4b (Based on the trailing twelve months to January 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 $0.52 in profit.

Why Is ROE Important For Earnings Growth?

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

Palo Alto Networks’ Earnings Growth And 52% ROE

First thing first, we like that Palo Alto Networks has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 13% which is quite remarkable. As a result, Palo Alto Networks’ exceptional 51% net income growth seen over the past five years, doesn’t come as a surprise.

As a next step, we compared Palo Alto Networks’ 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 15%.

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. Doing so will help them establish if the stock’s future looks promising or ominous. Is PANW fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Palo Alto Networks Efficiently Re-investing Its Profits?

Palo Alto Networks doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with Palo Alto Networks’ performance. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.