Yahoo Finance Is The Market Rewarding NVE Corporation (NASDAQ:NVEC) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?
NVE (NASDAQ:NVEC) has had a rough month with its share price down 7.4%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to NVE's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for NVE
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 NVE is:
29% = US$18m ÷ US$63m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.29 in profit.
Why Is ROE Important For Earnings Growth?
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.
NVE's Earnings Growth And 29% ROE
First thing first, we like that NVE has an impressive ROE. Secondly, even when compared to the industry average of 17% the company's ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for NVE in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then compared NVE's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 31% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is NVE fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is NVE Making Efficient Use Of Its Profits?
NVE's very high three-year median payout ratio of 138% suggests that the company is paying its shareholders more than what it is earning. The absence in growth is therefore not surprising. Paying a dividend higher than reported profits is not a sustainable move. That's a huge risk in our books.
Additionally, NVE has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Summary
On the whole, we feel that the performance shown by NVE can be open to many interpretations. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on NVE and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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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