# Arista Networks, Inc.'s (NYSE:ANET) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Arista Networks' (NYSE:ANET) stock increased significantly by 38% 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. Specifically, we decided to study Arista Networks' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Arista Networks

## How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Arista Networks is:

28% = US\$1.4b ÷ US\$4.9b (Based on the trailing twelve months to December 2022).

The 'return' is the profit over the last twelve months. So, this means that for every \$1 of its shareholder's investments, the company generates a profit of \$0.28.

## What Is The Relationship Between ROE And 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.

## A Side By Side comparison of Arista Networks' Earnings Growth And 28% ROE

First thing first, we like that Arista Networks has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. So, the substantial 23% net income growth seen by Arista Networks over the past five years isn't overly surprising.

Next, on comparing Arista Networks' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% in the same period.

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 Arista Networks fairly valued compared to other companies? These 3 valuation measures might help you decide.

## Is Arista Networks Making Efficient Use Of Its Profits?

Given that Arista Networks doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

## Conclusion

In total, we are pretty happy with Arista Networks' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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