editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
With its stock down 16% over the past three months, it is easy to disregard NVE (NASDAQ:NVEC). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on NVE’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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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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 NVE is:
24% = US$15m ÷ US$63m (Based on the trailing twelve months to December 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 $0.24 in profit.
Check out our latest analysis for NVE
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.
To begin with, NVE has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 12% also doesn’t go unnoticed by us. This likely paved the way for the modest 8.9% net income growth seen by NVE over the past five years.
As a next step, we compared NVE’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 13% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 NVE’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
