Are Strong Financial Prospects The Force That Is Driving The Momentum In Frequency Electronics, Inc.'s NASDAQ:FEIM) Stock?

Most readers would already be aware that Frequency Electronics' (NASDAQ:FEIM) stock increased significantly by 14% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Frequency Electronics' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

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 Frequency Electronics is:

45% = US$23m ÷ US$52m (Based on the trailing twelve months to January 2025).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.45 in profit.

View our latest analysis for Frequency Electronics

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Frequency Electronics' Earnings Growth And 45% ROE

Firstly, we acknowledge that Frequency Electronics has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. Under the circumstances, Frequency Electronics' considerable five year net income growth of 55% was to be expected.

Next, on comparing with the industry net income growth, we found that Frequency Electronics' growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Frequency Electronics is trading on a high P/E or a low P/E, relative to its industry.

Is Frequency Electronics Using Its Retained Earnings Effectively?

Summary

In total, we are pretty happy with Frequency Electronics' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 1 risk we have identified for Frequency Electronics visit our risks dashboard for free.

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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.