Shares of NVIDIA (NASDAQ:NVDA) are up 25% over the past month. Since the market usually pays for a company’s long-term fundamentals, we decided to study a company’s key performance indicators to see if they can influence the market. Specifically, today we will focus on NVIDIA’s ROE.
Return on equity or ROE is an important measure used to assess how efficiently a company’s management uses the company’s capital. In short, ROE refers to the return on every dollar of its shareholder investments.
Check out our latest analysis for NVIDIA
How to calculate return on equity?
return on equity formula Is:
Return on equity = net income (from continuing operations) ÷ equity
So based on the formula above, the ROE for NVIDIA is:
28% = US$6.0 billion ÷ US$21 billion (based on twelve months to October 2022).
“Withdrawal” is the after-tax amount earned in the previous 12 months. This means that for every $1 in equity, the company generated $0.28 in profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. We are able to evaluate a company’s future ability to generate profits based on what portion of the profits it decides to reinvest or ‘retain’. Assuming everything else remains unchanged, the higher the ROE and retained earnings, the higher the company’s growth rate compared to companies that don’t necessarily bear these characteristics.
NVIDIA’s earnings growth and 28% ROE
First of all, we like that NVIDIA has an impressive ROE. Second, the comparison with the industry-reported average ROE of 19% has not gone unnoticed by us either. Under these circumstances, NVIDIA’s five-year net profit growth of 23% was to be expected.
Then, when we compare NVIDIA’s net revenue growth to the industry, we see that the company’s reported growth is comparable to the industry’s average growth rate of 27% over the same period.
earnings growth in the past
Earnings growth is a big factor in stock valuation. It is important for an investor to know whether the market has priced in a company’s expected earnings growth (or decline). This allows them to identify whether the stock’s future looks promising or ominous. If you’re wondering what NVIDIA’s valuation is, check out this price-to-earnings ratio benchmark against the industry.
Is NVIDIA using its retained earnings effectively?
NVIDIA has a very low three-year average payout ratio of 7.1%, which means it’s left with the remaining 93% to reinvest in its business. This shows that management reinvests most of the profits to grow the company as evidenced by the growth witnessed by the company.
In addition, NVIDIA has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Current analyst estimates suggest that the company’s future payout ratio is expected to fall to 3.4% over the next three years. As a result, the expected decline in NVIDIA’s payout ratio explains the projected 63% increase in the company’s future ROE over the same period.
Overall, we’re pretty happy with NVIDIA’s performance. We especially like that the company invests heavily in its business, and at a high rate of return. Unsurprisingly, this has resulted in an impressive increase in income. That said, looking at current analyst estimates, we see that the company’s earnings are expected to accelerate. Watch this to learn more about the company’s future earnings growth forecasts free For more information on analyst forecasts for the company.
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This Simply Wall St article is general in nature. We only comment based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analytics driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall Street has no position in any of the listed stocks.
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