Australia markets closed
  • ALL ORDS

    7,709.50
    +21.50 (+0.28%)
     
  • ASX 200

    7,493.80
    +25.50 (+0.34%)
     
  • AUD/USD

    0.7108
    -0.0009 (-0.13%)
     
  • OIL

    82.14
    +1.13 (+1.39%)
     
  • GOLD

    1,930.00
    0.00 (0.00%)
     
  • BTC-AUD

    32,268.34
    -440.12 (-1.35%)
     
  • CMC Crypto 200

    519.56
    -7.62 (-1.45%)
     
  • AUD/EUR

    0.6534
    +0.0005 (+0.08%)
     
  • AUD/NZD

    1.0963
    +0.0002 (+0.02%)
     
  • NZX 50

    12,036.05
    +12.59 (+0.10%)
     
  • NASDAQ

    12,051.48
    +236.79 (+2.00%)
     
  • FTSE

    7,765.14
    +4.03 (+0.05%)
     
  • Dow Jones

    33,949.41
    +205.57 (+0.61%)
     
  • DAX

    15,138.30
    +5.45 (+0.04%)
     
  • Hang Seng

    22,688.90
    +122.12 (+0.54%)
     
  • NIKKEI 225

    27,382.56
    +19.81 (+0.07%)
     

Western Digital Corporation's (NASDAQ:WDC) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at Western Digital's (NASDAQ:WDC) recent performance, when its stock has declined 23% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Western Digital's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Western Digital

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Western Digital is:

7.6% = US$917m ÷ US$12b (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax 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 $0.08 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. 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.

Western Digital's Earnings Growth And 7.6% ROE

When you first look at it, Western Digital's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 23%. Despite this, surprisingly, Western Digital saw an exceptional 25% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Western Digital's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same period.

past-earnings-growth
past-earnings-growth

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 WDC? You can find out in our latest intrinsic value infographic research report.

Is Western Digital Making Efficient Use Of Its Profits?

Western Digital doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Western Digital has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here