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NVIDIA (NASDAQ:NVDA) stock has increased by a whopping 75% over the past three months. Considering the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s financial health over the long term usually drives market results. In this article, we decided to focus on NVIDIA’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company’s shareholders.
Check out our latest analysis for NVIDIA.
How do you calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, NVIDIA’s ROE is:
69% = USD 30 billion ÷ USD 43 billion (based on trailing 12 months to January 2024).
“Revenue” is the income a company has earned over the past year. This means that for every $1 a shareholder invests, the company generates $0.69 in profit for him.
What relationship does ROE have with profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
A side-by-side comparison of NVIDIA’s revenue growth and ROE of 69%
First, we recognize that NVIDIA’s ROE is very high. Secondly, we can’t ignore the comparison to the average ROE of 14% reported by the industry. So it’s not really surprising that NVIDIA has achieved a massive 39% net income increase over the past five years.
We then compared NVIDIA’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 29%.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock’s future is promising or ominous. 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 outlook. So you might want to see whether NVIDIA is trading on a higher or lower P/E relative to its industry.
Is NVIDIA effectively reinvesting its profits?
NVIDIA’s median three-year payout ratio is a very low 5.2%, meaning the remaining 95% can be reinvested into the business. This suggests that management is reinvesting most of their profits into growing the business, as the company’s growth shows.
Additionally, NVIDIA has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders. According to existing analyst forecasts, the company’s future dividend payout ratio is expected to drop to 0.5% in the next three years. Still, some predict that NVIDIA’s future ROE will drop to 51%, even though NVIDIA’s dividend payout ratio is expected to decline. This suggests that there may be other factors causing the company’s expected decline in his ROE.
conclusion
Overall, we feel that NVIDIA’s performance is very good. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. Unsurprisingly, this led to impressive revenue growth. That said, the company’s revenue growth is expected to slow, as predicted by current 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.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be 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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