ON Semiconductor Corporation (NASDAQ:ON) Stock Fared Well: Is the Market Following Strong Financials?

ON Semiconductor (NASDAQ:ON) stock is up 7.3% in the past three months. 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. In this article, we decided to focus on ON Semiconductor’s ROE.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for ON Semiconductor

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for ON Semiconductor is:

32% = US$1.7B ÷ US$5.4B (based on trailing 12 months to July 2022).

The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.32.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

ON Semiconductor earnings growth and ROE of 32%

For starters, ON Semiconductor has a pretty high ROE, which is interesting. Second, even when compared to the industry average of 19%, the company’s ROE is quite impressive. Probably because of this, ON Semiconductor has been able to see a decent 12% net income growth over the past five years.

Then, comparing with industry net income growth, we found that ON Semiconductor’s reported growth was lower than industry growth by 26% over the same period, which we don’t don’t like to see.

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. What is ON worth today? The intrinsic value infographic in our free research report visualizes whether ON is currently being mispriced by the market.

Does ON Semiconductor Use Retained Earnings Effectively?

ON Semiconductor does not pay any dividends, which means that all of its profits are reinvested in the business, which explains the company’s good earnings growth.

Conclusion

Overall, we’re pretty happy with ON Semiconductor’s performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent revenue growth is not surprising. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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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.