Aviat Networks, Inc.'s (NASDAQ:AVNW) Stock Been Rising: Are Strong Financials Guiding The Market?

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Aviat Networks’ (NASDAQ:AVNW) stock up by 4.2% over the past month. 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. Specifically, we decided to study Aviat Networks’ ROE in this article.

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

Check out our latest analysis for Aviat Networks

How Is ROE Calculated?

Return on equity 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 Aviat Networks is:

56% = US$108m ÷ US$193m (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.56 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Aviat Networks’ Earnings Growth And 56% ROE

To begin with, Aviat Networks has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 16% also doesn’t go unnoticed by us. So, the substantial 85% net income growth seen by Aviat Networks over the past five years isn’t overly surprising.

As a next step, we compared Aviat Networks’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 22%.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. 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 Aviat Networks is trading on a high P/E or a low P/E, relative to its industry.

Is Aviat Networks Using Its Retained Earnings Effectively?

Aviat Networks doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.

Summary

In total, we are pretty happy with Aviat Networks’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.