Is the strong financial outlook the driving force behind NVIDIA Corporation’s NASDAQ: NVDA) stock?


Most readers already know that NVIDIA (NASDAQ: NVDA) stock has increased significantly by 32% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we’ll be paying close attention to NVIDIA’s ROE today.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for NVIDIA is:

34% = US $ 8.2 billion ÷ US $ 24 billion (based on the last twelve months to October 2021).

The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.34.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A Side-by-Side Comparison of NVIDIA’s 34% Profit Growth and ROE

First, we recognize that NVIDIA has a significantly high ROE. Additionally, the company’s ROE is 16% higher than the industry average, which is quite remarkable. Under these circumstances, NVIDIA’s net profit growth of 22% over five years was to be expected.

In the next step, we compared NVIDIA’s net income growth with the industry, and luckily, we found that the growth observed by the company is above the industry average growth by 15%.

NasdaqGS: NVDA Past Profit Growth December 20, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about NVIDIA’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is NVIDIA Reinvesting Profits Effectively?

NVIDIA’s three-year median payout ratio is less than 11%, which means it retains a higher percentage (89%) of its profits. So it looks like NVIDIA is reinvesting its profits massively to grow its business, which is reflected in its profit growth.

Additionally, NVIDIA has paid dividends over a nine-year period, which means the company is very serious about sharing its profits with its shareholders. Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 3.0% over the next three years. Either way, the ROE is unlikely to change much for the company despite the expected lower payout ratio.

Conclusion

Overall, we think Nvidia’s performance is pretty good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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