Yahoo Finance NVIDIA Corporation's (NASDAQ:NVDA) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that NVIDIA's (NASDAQ:NVDA) stock increased significantly by 56% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study NVIDIA's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for NVIDIA
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NVIDIA is:
69% = US$30b ÷ US$43b (Based on the trailing twelve months to January 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.69 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
NVIDIA's Earnings Growth And 69% ROE
First thing first, we like that NVIDIA has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. As a result, NVIDIA's exceptional 39% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that NVIDIA's growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if NVIDIA is trading on a high P/E or a low P/E, relative to its industry.
Is NVIDIA Using Its Retained Earnings Effectively?
NVIDIA's three-year median payout ratio to shareholders is 5.2%, which is quite low. This implies that the company is retaining 95% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, NVIDIA has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 0.5% over the next three years. However, NVIDIA's future ROE is expected to decline to 53% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.
Conclusion
In total, we are pretty happy with NVIDIA's 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, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
