AudioCodes Ltd.'s (NASDAQ:AUDC) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
AudioCodes (NASDAQ:AUDC) has had a rough three months with its share price down 10.0%. 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 AudioCodes' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for AudioCodes
How To Calculate Return On Equity?
Return on equity 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 AudioCodes is:
11% = US$20m ÷ US$187m (Based on the trailing twelve months to March 2023).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.11 in profit.
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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of AudioCodes' Earnings Growth And 11% ROE
To begin with, AudioCodes seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This certainly adds some context to AudioCodes' exceptional 28% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then performed a comparison between AudioCodes' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 34% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is AUDC fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is AudioCodes Using Its Retained Earnings Effectively?
The three-year median payout ratio for AudioCodes is 39%, which is moderately low. The company is retaining the remaining 61%. By the looks of it, the dividend is well covered and AudioCodes is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, AudioCodes has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
Overall, we are quite pleased with AudioCodes' 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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