Most readers would already be aware that Natural Alternatives International's (NASDAQ:NAII) stock increased significantly by 59% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Natural Alternatives International's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You 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 Natural Alternatives International is:
5.1% = US$3.7m ÷ US$72m (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.05.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
A Side By Side comparison of Natural Alternatives International's Earnings Growth And 5.1% ROE
When you first look at it, Natural Alternatives International's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 15% either. Given the circumstances, the significant decline in net income by 28% seen by Natural Alternatives International over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.
However, when we compared Natural Alternatives International's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.6% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Natural Alternatives International fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Natural Alternatives International Making Efficient Use Of Its Profits?
On the whole, we feel that the performance shown by Natural Alternatives International can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 5 risks we have identified for Natural Alternatives International by visiting our risks dashboard for free on our platform here.
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What are the risks and opportunities for Natural Alternatives International?
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Natural Alternatives International
Natural Alternatives International, Inc. engages in formulating, manufacturing, and marketing nutritional supplements in the United States, Europe, Australia, Asia, Mexico, and Canada.
Excellent balance sheet and slightly overvalued.