Most readers would already be aware that National Instruments’ (NASDAQ:NATI) stock increased significantly by 23% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on National Instruments’ ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for National Instruments
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for National Instruments is:
16% = US$198m ÷ US$1.2b (Based on the trailing twelve months to September 2020).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.16.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of National Instruments’ Earnings Growth And 16% ROE
At first glance, National Instruments seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.7%. This probably laid the ground for National Instruments’ significant 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.
As a next step, we compared National Instruments’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about National Instruments”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is National Instruments Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 81% (implying that it keeps only 19% of profits) for National Instruments suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
Moreover, National Instruments is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 73% of its profits over the next three years. Accordingly, forecasts suggest that National Instruments’ future ROE will be 16% which is again, similar to the current ROE.
In total, we are pretty happy with National Instruments’ performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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