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Robust financials are driving the recent rally in Super Micro Computer, Inc. shares.
Super Micro Computer (NASDAQ:SMCI) has had a great run on the stock market, with its shares rising a significant 22% over the last month. Given that the market rewards strong financials over the long term, we wonder if that will be the case in this case. In this article, we decided to focus on Super Micro Computers 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. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
Check out our latest review for Super Micro Computer
How to calculate return on equity?
O formula for ROE It is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, the ROE for Super Micro Computer is:
21% = US$1.0b ÷ US$5.1b (Based on trailing twelve months to March 2024).
The ‘return’ is the revenue the company made in the last year. This means that for every $1 of equity, the company generated $0.21 in profit.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Super Micro Computer Earnings Growth and 21% ROE
For starters, Super Micro Computer’s ROE looks acceptable. Especially when compared to the industry average of 8.9%, the company’s ROE looks quite impressive. This certainly adds some context to Super Micro Computer’s exceptional 55% net profit growth seen over the past five years. We think there could also be other factors at play here. Such as – high profit retention or efficient management implemented.
As a next step, we compared Super Micro Computer’s net profit growth to that of the industry, and fortunately, we found that the growth seen by the company is higher than the industry average growth of 30%.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. This helps you determine whether the stock is poised for a bright or bleak future. How much is SMCI worth today? O intrinsic value infographic in our free research report helps visualize whether SMCI is currently mispriced by the market.
The story continues
Is Super Micro Computer making efficient use of its profits?
Currently, Super Micro Computer does not pay any regular dividends, which essentially means that it has been reinvesting all of its profits back into the business. This definitely contributes to the high earnings growth number we discussed above.
Conclusion
Overall, we feel that the Super Micro Computer’s performance has been very good. In particular, it is great to see that the company is investing heavily in its business and, together with a high rate of return, this has resulted in considerable growth in its profits. That said, the company’s earnings growth is expected to slow, as predicted by current analyst estimates. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page 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 your 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.