Is NextVision Stabilized Systems, Ltd.'s (TLV:NXSN) Recent Stock Performance Tethered To Its Strong Fundamentals?

NextVision Stabilized Systems' (TLV:NXSN) stock is up by a considerable 12% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study NextVision Stabilized Systems' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for NextVision Stabilized Systems

How Is ROE Calculated?

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:

47% = US$38m ÷ US$81m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.47.

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. 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.

NextVision Stabilized Systems' Earnings Growth And 47% ROE

To begin with, NextVision Stabilized Systems has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. Under the circumstances, NextVision Stabilized Systems' considerable five year net income growth of 75% was to be expected.

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 36% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 NXSN? You can find out in our latest intrinsic value infographic research report

Is NextVision Stabilized Systems Efficiently Re-investing Its Profits?

The three-year median payout ratio for NextVision Stabilized Systems is 41%, which is moderately low. The company is retaining the remaining 59%. 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.

While NextVision Stabilized Systems has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks 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.