Is Aehr Test Systems' (NASDAQ:AEHR) Latest Stock Performance A Reflection Of Its Financial Health?

Aehr Test Systems' (NASDAQ:AEHR) stock is up by a considerable 28% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Aehr Test Systems' ROE.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Aehr Test Systems

How To Calculate Return On Equity?

ROE 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 Aehr Test Systems is:

22% = US$12m ÷ US$57m (Based on the trailing twelve months to November 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.22 in profit.

What Has ROE Got To Do With 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. 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.

Aehr Test Systems' Earnings Growth And 22% ROE

To start with, Aehr Test Systems' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. This probably goes some way in explaining Aehr Test Systems' significant 54% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Aehr Test Systems' 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 28%.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Aehr Test Systems is trading on a high P/E or a low P/E, relative to its industry.

Is Aehr Test Systems Using Its Retained Earnings Effectively?

Aehr Test Systems 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.

Conclusion

Overall, we are quite pleased with Aehr Test Systems' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 4 risks we have identified for Aehr Test Systems visit our risks dashboard for free.

What are the risks and opportunities for Aehr Test Systems?

NasdaqCM:AEHR

Aehr Test Systems

Aehr Test Systems provides test systems for burning-in semiconductor devices in wafer level, singulated die, and package part form worldwide.Show more

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Rewards

• Revenue is forecast to grow 40.25% per year

• Earnings grew by 892% over the past year

Risks

• High level of non-cash earnings

• Shareholders have been diluted in the past year

• Significant insider selling over the past 3 months

• Volatile share price over the past 3 months

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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.