Advertisement
Singapore markets open in 8 hours 36 minutes

  • Straits Times Index

    3,296.89
    +4.20 (+0.13%)
     

  • S&P 500

    5,037.95
    +19.56 (+0.39%)
     

  • Dow

    38,052.59
    +149.30 (+0.39%)
     

  • Nasdaq

    15,731.73
    +126.25 (+0.81%)
     

  • Bitcoin USD

    58,988.33
    +1,882.54 (+3.30%)
     

  • CMC Crypto 200

    1,274.41
    +3.66 (+0.29%)
     

  • FTSE 100

    8,172.15
    +50.91 (+0.63%)
     

  • Gold

    2,309.80
    -1.20 (-0.05%)
     

  • Crude Oil

    78.76
    -0.24 (-0.30%)
     

  • 10-Yr Bond

    4.6000
    +0.0050 (+0.11%)
     

  • Nikkei

    38,236.07
    -37.98 (-0.10%)
     

  • Hang Seng

    18,207.13
    +444.10 (+2.50%)
     

  • FTSE Bursa Malaysia

    1,580.30
    +4.33 (+0.27%)
     

  • Jakarta Composite Index

    7,117.42
    -116.77 (-1.61%)
     

  • PSE Index

    6,646.55
    -53.94 (-0.81%)
     

Declining Stock and Solid Fundamentals: Is The Market Wrong About Advanced Energy Industries, Inc. (NASDAQ:AEIS)?

editorial-team@simplywallst.com (Simply Wall St)
·4-min read

It is hard to get excited after looking at Advanced Energy Industries' (NASDAQ:AEIS) recent performance, when its stock has declined 7.5% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Advanced Energy Industries' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Advanced Energy Industries

How Is ROE Calculated?

The formula for return on equity is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Advanced Energy Industries is:

11% = US$131m ÷ US$1.1b (Based on the trailing twelve months to December 2023).

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 $0.11.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Advanced Energy Industries' Earnings Growth And 11% ROE

To begin with, Advanced Energy Industries seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. This certainly adds some context to Advanced Energy Industries' moderate 14% net income growth seen over the past five years.

Next, on comparing Advanced Energy Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Advanced Energy Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Advanced Energy Industries Using Its Retained Earnings Effectively?

Advanced Energy Industries' three-year median payout ratio to shareholders is 8.4% (implying that it retains 92% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Advanced Energy Industries has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 6.1% over the next three years. Still forecasts suggest that Advanced Energy Industries' future ROE will drop to 8.5% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Summary

In total, we are pretty happy with Advanced Energy Industries' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.