Is Weakness In GoPro, Inc. (NASDAQ:GPRO) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Published
June 30, 2022
NasdaqGS:GPRO
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With its stock down 34% over the past three months, it is easy to disregard GoPro (NASDAQ:GPRO). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to GoPro'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.

See our latest analysis for GoPro

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 GoPro is:

65% = US$387m ÷ US$593m (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.65.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

GoPro's Earnings Growth And 65% ROE

Firstly, we acknowledge that GoPro has a significantly high ROE. Secondly, even when compared to the industry average of 21% the company's ROE is quite impressive. So, the substantial 74% net income growth seen by GoPro over the past five years isn't overly surprising.

As a next step, we compared GoPro's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 31%.

past-earnings-growth
NasdaqGS:GPRO Past Earnings Growth June 30th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is GoPro fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is GoPro Using Its Retained Earnings Effectively?

GoPro doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, we are pretty happy with GoPro's 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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