U.S. markets open in 9 hours 25 minutes
  • S&P Futures

    4,565.50
    +0.25 (+0.01%)
     
  • Dow Futures

    35,640.00
    -4.00 (-0.01%)
     
  • Nasdaq Futures

    15,539.25
    -5.75 (-0.04%)
     
  • Russell 2000 Futures

    2,289.40
    -4.50 (-0.20%)
     
  • Crude Oil

    84.08
    -0.57 (-0.67%)
     
  • Gold

    1,790.00
    -3.40 (-0.19%)
     
  • Silver

    24.10
    +0.02 (+0.07%)
     
  • EUR/USD

    1.1605
    +0.0003 (+0.02%)
     
  • 10-Yr Bond

    1.6190
    -0.0160 (-0.98%)
     
  • Vix

    15.98
    +0.74 (+4.86%)
     
  • GBP/USD

    1.3770
    +0.0007 (+0.05%)
     
  • USD/JPY

    113.9600
    -0.1690 (-0.15%)
     
  • BTC-USD

    60,688.43
    -2,089.62 (-3.33%)
     
  • CMC Crypto 200

    1,475.18
    -29.97 (-1.99%)
     
  • FTSE 100

    7,277.62
    +54.80 (+0.76%)
     
  • Nikkei 225

    28,927.40
    -178.61 (-0.61%)
     

Is Super Micro Computer, Inc.'s (NASDAQ:SMCI) Recent Performance Tethered To Its Attractive Financial Prospects?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Most readers would already know that Super Micro Computer's (NASDAQ:SMCI) stock increased by 6.8% 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. Specifically, we decided to study Super Micro Computer's ROE in this article.

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

Check out our latest analysis for Super Micro Computer

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 Super Micro Computer is:

10% = US$112m ÷ US$1.1b (Based on the trailing twelve months to June 2021).

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 $0.10 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Super Micro Computer's Earnings Growth And 10% ROE

To start with, Super Micro Computer's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. Consequently, this likely laid the ground for the decent growth of 12% seen over the past five years by Super Micro Computer.

Next, on comparing with the industry net income growth, we found that Super Micro Computer's reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for SMCI? You can find out in our latest intrinsic value infographic research report.

Is Super Micro Computer Making Efficient Use Of Its Profits?

Super Micro Computer doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

On the whole, we feel that Super Micro Computer's performance has been quite good. 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 a good amount of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.

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