editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
Harmonic (NASDAQ:HLIT) has had a rough three months with its share price down 28%. 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 Harmonic’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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
We’ve discovered 2 warning signs about Harmonic. View them for free.
ROE 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 Harmonic is:
8.4% = US$39m ÷ US$465m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.08 in profit.
See our latest analysis for Harmonic
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. 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.
On the face of it, Harmonic’s ROE is not much to talk about. Next, when compared to the average industry ROE of 13%, the company’s ROE leaves us feeling even less enthusiastic. In spite of this, Harmonic was able to grow its net income considerably, at a rate of 61% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings 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 Harmonic’s growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is Harmonic fairly valued compared to other companies? These 3 valuation measures might help you decide.
