The fundamentals of Entegris, Inc. (NASDAQ: ENTG) look pretty strong: Could the market be wrong about the stock?
Entegris (NASDAQ: ENTG) had a tough month with its stock price down 6.0%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. More precisely, we decided to study the ROE of Entegris in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Entegris is:
22% = US $ 339 million Ã· US $ 1.5 billion (based on the last twelve months to July 2021).
The “return” is the profit of the last twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.22.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the company is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the company. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Entegris profit growth and 22% ROE
First of all, we love that Entegris has an impressive ROE. Second, even compared to the industry average of 15%, the company’s ROE is quite impressive. Under these circumstances, Entegris’ net profit growth of 27% over five years was to be expected.
We then compared the growth of Entegris’ net income with the industry and we are happy to see that the growth number of the company is higher compared to the industry which has a growth rate of 17% at the during the same period.
NasdaqGS: ENTG Past Profit Growth 23 Aug 2021
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. If you are wondering about Entegris valuation, check out this gauge of its price / earnings ratio, compared to its industry.
Does Entegris use its profits efficiently?
Entegris’ three-year median payout ratio is less than 16%, which means it retains a higher percentage (84%) of its profits. It therefore appears that Entegris is reinvesting its profits massively to develop its business, which is reflected in the growth of its profits.
In addition, Entegris pays dividends over a period of four years. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 8.4% over the next three years. Either way, the ROE is not expected to change much for the company despite the expected lower payout ratio.
All in all, we are quite satisfied with the performance of Entegris. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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 shares 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 the mentioned stocks.
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