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Is Garmin Ltd.'s (NASDAQ:GRMN) Recent Performance Tethered To Its Attractive Financial Prospects?

·4 min read

Most readers would already know that Garmin's (NASDAQ:GRMN) stock increased by 9.2% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Garmin's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Garmin

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 Garmin is:

18% = US$1.1b ÷ US$5.7b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Garmin's Earnings Growth And 18% ROE

To begin with, Garmin seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. This certainly adds some context to Garmin's moderate 15% net income growth seen over the past five years.

We then performed a comparison between Garmin's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Garmin fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Garmin Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Garmin suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Garmin has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 46%. As a result, Garmin's ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Conclusion

On the whole, we feel that Garmin's performance has been quite good. 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, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

This article by Simply Wall St is general in nature. 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.

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