GlobalFoundries’ (NASDAQ:GFS) stock up by 3.3% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study GlobalFoundries’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for GlobalFoundries
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 GlobalFoundries is:
6.4% = US$745m ÷ US$12b (Based on the trailing twelve months to September 2024).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.06 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
At first glance, GlobalFoundries’ ROE doesn’t look very promising. Next, when compared to the average industry ROE of 11%, the company’s ROE leaves us feeling even less enthusiastic. However, we we’re pleasantly surprised to see that GlobalFoundries grew its net income at a significant rate of 68% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that GlobalFoundries’ growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.
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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for GFS? You can find out in our latest intrinsic value infographic research report.
