Does its financial data have a role to play in the recent increase in inventory at Ciena Corporation (NYSE: CIEN)?
Most readers already know that Ciena (NYSE: CIEN) stock has risen significantly 46% in the past three months. We wonder if and what role company financials are playing in this price change, because a company’s long-term fundamentals usually dictate market outcomes. In this article, we have decided to focus on Ciena’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Ciena
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, Ciena’s ROE is:
17% = US $ 500 million ÷ US $ 3.0 billion (based on the last twelve months to October 2021).
The “return” is the amount earned after tax over the past twelve months. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.17 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Ciena profit growth and 17% ROE
For starters, Ciena’s ROE seems acceptable. Additionally, the company’s ROE is similar to the industry average of 17%. Despite the modest returns, Ciena’s five-year net income growth was quite weak, averaging only 2.4%. We believe that low growth, when returns are moderate, could be the result of certain circumstances such as low earnings retention or misallocation of capital.
Then, comparing with the industry’s net income growth, we found that Ciena’s reported growth was 10% lower than the industry’s growth in the same period, which we don’t like. see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is CIEN valued enough? This intrinsic business value infographic has everything you need to know.
Is Ciena using its profits effectively?
Ciena does not pay any dividends, which means that it keeps all of its profits. However, there has been very little profit growth to show for this. So there could be another explanation for this. For example, the business of the company can deteriorate.
All in all, it looks like Ciena has some positive aspects for her business. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.