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Is ON Semiconductor Corporation's (NASDAQ:ON) Latest Stock Performance Being Led By Its Strong Fundamentals?
ON Semiconductor's (NASDAQ:ON) stock is up by 8.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study ON Semiconductor'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for ON Semiconductor
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 ON Semiconductor is:
31% = US$1.9b ÷ US$6.2b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.31 in profit.
What Has ROE Got To Do With 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.
ON Semiconductor's Earnings Growth And 31% ROE
First thing first, we like that ON Semiconductor has an impressive ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. Under the circumstances, ON Semiconductor's considerable five year net income growth of 21% was to be expected.
Next, on comparing with the industry net income growth, we found that ON Semiconductor's reported growth was lower than the industry growth of 28% in the same period, which is not something we like to see.
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. What is ON worth today? The intrinsic value infographic in our free research report helps visualize whether ON is currently mispriced by the market.
Is ON Semiconductor Efficiently Re-investing Its Profits?
ON Semiconductor doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.
Summary
On the whole, we feel that ON Semiconductor's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
What are the risks and opportunities for ON Semiconductor?
ON Semiconductor Corporation provides intelligent sensing and power solutions in the United States and internationally.
Rewards
Price-To-Earnings ratio (17.8x) is below the Semiconductor industry average (18x)
Earnings are forecast to grow 7.84% per year
Earnings grew by 88.4% over the past year
Risks
No risks detected for ON from our risks checks.
Further research on
ON Semiconductor
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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.
About NasdaqGS:ON
ON Semiconductor
ON Semiconductor Corporation provides intelligent sensing and power solutions in the United States and internationally.
Outstanding track record with flawless balance sheet.
