Are Robust Financials Driving The Recent Rally In Qorvo, Inc.'s (NASDAQ:QRVO) Stock?

By
Simply Wall St
Published
July 25, 2021
NasdaqGS:QRVO
Source: Shutterstock

Most readers would already be aware that Qorvo's (NASDAQ:QRVO) stock increased significantly by 5.6% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Qorvo's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Qorvo

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 Qorvo is:

16% = US$734m ÷ US$4.6b (Based on the trailing twelve months to April 2021).

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 $0.16.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Qorvo's Earnings Growth And 16% ROE

At first glance, Qorvo seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 14%. This probably goes some way in explaining Qorvo's significant 74% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. 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.

Next, on comparing with the industry net income growth, we found that Qorvo's growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:QRVO Past Earnings Growth July 25th 2021

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. Has the market priced in the future outlook for QRVO? You can find out in our latest intrinsic value infographic research report.

Is Qorvo Using Its Retained Earnings Effectively?

Conclusion

Overall, we are quite pleased with Qorvo's 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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