Most readers would already be aware that Napco Security Technologies’ (NASDAQ:NSSC) stock increased significantly by 36% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Napco Security Technologies’ ROE today.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Napco Security Technologies
How Is ROE Calculated?
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 Napco Security Technologies is:
20% = US$26m ÷ US$129m (Based on the trailing twelve months to December 2022).
The ‘return’ is the profit over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.20.
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.
A Side By Side comparison of Napco Security Technologies’ Earnings Growth And 20% ROE
At first glance, Napco Security Technologies seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 13%. Probably as a result of this, Napco Security Technologies was able to see an impressive net income growth of 21% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Napco Security Technologies’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 18% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Napco Security Technologies is trading on a high P/E or a low P/E, relative to its industry.
Is Napco Security Technologies Making Efficient Use Of Its Profits?
Given that Napco Security Technologies 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
On the whole, we feel that Napco Security Technologies’ 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 substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Valuation is complex, but we’re helping make it simple.
Find out whether Napco Security Technologies is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
