Are Robust Financials Driving The Recent Rally In NextVision Stabilized Systems, Ltd.'s (TLV:NXSN) Stock?

Most readers would already be aware that NextVision Stabilized Systems' (TLV:NXSN) stock increased significantly by 48% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study NextVision Stabilized Systems' ROE in this article.

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.

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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 NextVision Stabilized Systems is:

48% = US$66m ÷ US$138m (Based on the trailing twelve months to December 2024).

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 ₪0.48 in profit.

View our latest analysis for NextVision Stabilized Systems

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

NextVision Stabilized Systems' Earnings Growth And 48% ROE

To begin with, NextVision Stabilized Systems has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. As a result, NextVision Stabilized Systems' exceptional 66% net income growth seen over the past five years, doesn't come as a surprise.

We then compared NextVision Stabilized Systems' 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 33% in the same 5-year period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about NextVision Stabilized Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is NextVision Stabilized Systems Efficiently Re-investing Its Profits?

NextVision Stabilized Systems has a three-year median payout ratio of 41% (where it is retaining 59% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and NextVision Stabilized Systems is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, NextVision Stabilized Systems is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

Overall, we are quite pleased with NextVision Stabilized Systems' 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for NextVision Stabilized Systems visit our risks dashboard for free.

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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.