Is ON Semiconductor Corporation’s (NASDAQ:ON) Latest Stock Performance Being Led By Its Strong Fundamentals?

ON Semiconductor (NASDAQ:ON) stock is up 8.7% over the past three months. Given that the market rewards strong financials over the long term, we wonder if that is the case in this case. Specifically, we decided to examine ON Semiconductor’s ROE in this article.

ROE, or return on equity, is a useful tool for assessing how effectively a company is generating returns on the investment received from its shareholders. Put simply, it measures a company’s profitability in relation to its equity.

Check out our latest analysis for ON Semiconductor

How do you calculate return on equity?

The return on equity can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

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

31% = $1.9 billion ÷ $6.2 billion (based on trailing 12 months to December 2022).

The “return” is the annual profit. One way to think of this is that for every $1 in shareholder equity, the company makes $0.31 in profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profitable measure of a company’s future profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of ​​the company’s growth potential. In general, companies with a high return on equity and earnings retention, all other things being equal, have a higher growth rate than companies that do not share these characteristics.

ON Semiconductor earnings growth and 31% ROE

First, we like that ON Semiconductor has an impressive ROE. Second, the company’s ROE itself is pretty impressive compared to the industry average of 19%. Under these circumstances, ON Semiconductor’s substantial five-year net profit growth of 21% was to be expected.

Next, when we compare it to industry net income growth, we found that ON Semiconductor’s reported growth was lower than industry growth of 28% over the same period, which we don’t like to see.

Earnings growth is an important factor in stock valuation. Next, investors need to determine whether expected earnings growth, or lack of it, is already embedded in the stock price. That way they have an idea of ​​whether the stock is headed into clear blue waters or if swampy waters await them. What is ON worth today? The intrinsic value infographic in our free research report helps visualize if ON is currently mispriced by the market.

Is ON Semiconductor reinvesting its profits efficiently?

ON Semiconductor doesn’t currently pay a dividend, which essentially means it’s reinvested all of its profits into the business. This definitely contributes to the high earnings growth we discussed above.

Summary

Overall, we think ON Semiconductor’s performance is quite good. In particular, it’s great to see that the company has invested heavily in its business and has resulted in respectable earnings growth along with a high rate of return. However, as projected by the latest analyst estimates, the company’s earnings growth is likely to slow. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.