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Are robust financials driving the recent rally in Universal Display Corporation (NASDAQ:OLED) stock?
Universal Display (NASDAQ:OLED) shares are up a considerable 17% over the past month. Since the market typically pays 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 Universal displays ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. Put another way, it reveals the company’s success in transforming shareholder investments into profits.
Check out our latest review for Universal Display
How to calculate return on equity?
O formula for return on equity It is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, the ROE for Universal Display is:
15% = US$220m ÷ US$1.5b (based on trailing twelve months to March 2024).
The ‘return’ is the profit from the last twelve months. Another way to think of this is that for every $1 of equity, the company was able to make $0.15 in profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profit-generating indicator for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we will then be able to assess a company’s earnings growth potential. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Universal Display earnings growth and 15% ROE
For starters, Universal Display appears to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 15%. This likely goes some way to explaining Universal Display’s moderate 15% growth over the past five years, among other factors.
As a next step, we compared Universal Display’s net profit growth to the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 31% over the same period.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already factored into the stock price. This helps them determine whether the stock is poised for a bright or bleak future. A 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 might want check if Universal Display is trading at a high or low P/Ein relation to your sector.
The story continues
Is Universal Display reinvesting its profits efficiently?
Universal Display has a three-year average payout ratio of 27%, which implies it retains the remaining 73% of its profits. This suggests that its dividends are well covered, and given the decent growth seen by the company, it appears that management is reinvesting its profits efficiently.
Furthermore, Universal Display is determined to continue sharing its profits with shareholders, which we deduce from its seven-year long history of paying dividends. By studying the latest analyst consensus data, we found that the company is expected to continue paying out approximately 29% of its earnings over the next three years.
Conclusion
In total, we are very happy with the performance of the Universal Display. In particular, it is great to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in respectable growth in its profits. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.