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Advanced Micro Devices, Inc. (NASDAQ:AMD) shares have been showing weakness lately, but the financial outlook looks decent: Is the market wrong?
With its shares falling 17% over the past three months, it’s easy to write off Advanced Micro Devices (NASDAQ:AMD). However, the company’s fundamentals look pretty decent and the long-term financials are generally in line with future market price movements. In this article, we decided to focus on Advanced Microdevices’ ROE.
Return on equity or ROE is a fundamental measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures a company’s profitability in relation to shareholders’ equity.
See our latest analysis for Advanced Micro Devices
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, the ROE for Advanced Micro Devices is:
2.0% = US$1.1b ÷ US$56b (Based on trailing twelve months to March 2024).
The ‘return’ refers to a company’s profits over the last year. This means that for every $1 of equity, the company generated $0.02 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. Generally speaking, other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
Advanced Micro Devices Earnings Growth and 2.0% ROE
It’s pretty clear that Advanced Micro Devices’ ROE is quite low. Even when compared to the industry average of 15%, the ROE figure is quite disappointing. However, we can see that Advanced Micro Devices has seen modest net profit growth of 7.8% over the last five years. We believe that there may be other aspects that are positively influencing the growth of the company’s results. For example, it’s possible that the company’s management has made some good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Advanced Micro Devices’ net income 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
Earnings growth is an important factor in stock valuation. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. Doing so will give you an idea of whether the action is heading towards clear blue waters or if swampy waters await. 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 Advanced Micro Devices is trading on a high or low P/Ein relation to your sector.
The story continues
Is Advanced Micro Devices using its retained earnings effectively?
Advanced Micro Devices doesn’t pay regular dividends, which means all of its profits are being reinvested back into the business, which explains the good earnings growth the company has seen.
Conclusion
Altogether, it appears that Advanced Micro Devices has some positives in its business. Specifically, its rather high earnings growth number, which was no doubt supported by the company’s high profit retention. Still, the low ROE means that all that reinvestment isn’t bringing much benefit to investors. That said, looking at current analyst estimates, we found that the company’s earnings are expected to gain momentum. To learn 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.
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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.