Should weakness in II-VI Incorporated (NASDAQ:IIVI) stock be taken as a sign that the market will correct the stock price given decent financials?
With its stock down 7.6% over the past week, II-VI (NASDAQ:IIVI) is easy to overlook. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In particular, we will pay attention to the ROE of II-VI today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for II-VI
How is ROE calculated?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for II-VI is:
7.1% = $306 million ÷ $4.3 billion (based on trailing 12 months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.07.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with a high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of II-VI earnings growth and ROE of 7.1%
At first glance, there is not much to say about the ROE of II-VI. Then, compared to the industry average ROE of 14%, the company’s ROE leaves us even less excited. However, the moderate net income growth of 19% seen by II-VI over the past five years is definitely positive. Thus, there could be other aspects that positively influence the profit growth of the company. For example, the business has a low payout ratio or is efficiently managed.
We then compared the net income growth of II-VI with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 16% during the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is the IIVI correctly valued? This intrinsic business value infographic has everything you need to know.
II-VI Does it use its retained earnings effectively?
II-VI currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.
All in all, we think II-VI certainly has positive factors to consider. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.