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Most readers already know that Alphabet (NASDAQ:GOOGL) stock is up 4.4% over the past month. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In particular, I would like to pay attention to Alphabet’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, ROE shows the return that each dollar of a shareholder’s investment generates.
Check out our latest analysis for Alphabet.
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Alphabet’s ROE is:
24% = USD 67 billion ÷ USD 273 billion (based on trailing 12 months to September 2023).
“Return” is the profit over the past 12 months. That means for every $1 of shareholders’ equity, the company generated $0.24 in profit for him.
What relationship does ROE have with profit growth?
So far, we have learned that ROE is a measure of a company’s profitability. We are then able to evaluate a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don’t have the same characteristics.
Alphabet’s Revenue Growth and ROE of 24%
To begin with, Alphabet’s ROE is quite high, which is interesting. Secondly, we can’t ignore the comparison to the average ROE of 11% reported by the industry. As a result, Alphabet’s exceptional 20% net income growth over the past five years is no surprise.
We then compared Alphabet’s net income growth rate to the industry. The same he found that the company’s growth rate was high when compared to the industry where in five years he recorded a growth rate of 6.2%.
Earnings growth is a big factor in stock valuation. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). This can help you decide whether to position the stock for a bright or bleak future. Is the market factoring in GOOGL’s future prospects? Find out in our latest Intrinsic Value infographic research report.
Is Alphabet using its profits efficiently?
Given that Alphabet does not pay dividends to shareholders, we can assume that the company reinvests all of its profits into business growth.
summary
Overall, I’m pretty happy with Alphabet’s performance. In particular, it’s great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. That said, the company’s revenue growth is expected to slow, according to the latest industry analyst forecasts. Learn more about the company’s future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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