Do Its Financials Have Any Role To Play In Driving NVE Corporation's (NASDAQ:NVEC) Stock Up Recently?

NVE (NASDAQ:NVEC) has had a great run on the share market with its stock up by a significant 15% over the last week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study NVE's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for NVE

How Do You Calculate Return On Equity?

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 NVE is:

26% = US$17m ÷ US$66m (Based on the trailing twelve months to March 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 $0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

NVE's Earnings Growth And 26% ROE

Firstly, we acknowledge that NVE has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. Probably as a result of this, NVE was able to see a decent net income growth of 11% over the last five years.

We then compared NVE's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 33% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is NVE fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is NVE Making Efficient Use Of Its Profits?

NVE has a very high three-year median payout ratio of 113% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates.

Moreover, NVE is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we feel that NVE certainly does have some positive factors to consider. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on NVE and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com