With its stock down 12% in the past three months, it’s easy to overlook KLA (NASDAQ: KLAC). However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In particular, we will be paying attention to KLA’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for KLA
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for KLA is:
77% = US$3.1 billion ÷ US$4.1 billion (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.77 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
KLA and ROE earnings growth of 77%
For starters, KLA has a pretty high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 19% also does not go unnoticed by us. Thus, the substantial net income growth of 27% observed by the KLA over the past five years is not too surprising.
We then performed a comparison between KLA’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 24% over the same period. period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is KLAC worth today? The intrinsic value infographic in our free research report helps visualize whether KLAC is currently being mispriced by the market.
Is the KLA using its profits effectively?
The three-year median payout ratio for KLA is 40%, which is moderately low. The company retains the remaining 60%. So it looks like KLA is effectively reinvesting to see impressive earnings growth (discussed above) and paying a well-covered dividend.
Additionally, KLA is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 22% over the next three years. However, KLA’s future ROE is expected to drop to 59% despite the expected decline in its payout ratio. We infer that there could be other factors that could be driving the company’s projected decline in ROE.
All in all, we are quite satisfied with KLA’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.