Is OSI Systems, Inc.'s (NASDAQ:OSIS) Latest Stock Performance Being Led By Its Strong Fundamentals?
OSI Systems' (NASDAQ:OSIS) stock is up by 2.1% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study OSI Systems' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for OSI Systems
How Do You 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 OSI Systems is:
15% = US$114m ÷ US$770m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.15 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
OSI Systems' Earnings Growth And 15% ROE
To start with, OSI Systems' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 10%. Probably as a result of this, OSI Systems was able to see a decent growth of 13% over the last five years.
As a next step, we compared OSI Systems' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 14% in the same period.
Earnings growth is a huge factor in stock valuation. 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 OSI Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is OSI Systems Efficiently Re-investing Its Profits?
Given that OSI Systems doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
Overall, we are quite pleased with OSI Systems' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
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.
