Weak Financial Prospects Seem To Be Dragging Down National Instruments Corporation (NASDAQ:NATI) Stock


National Instruments (NASDAQ:NATI) has had a rough three months with its share price down 20%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company’s key financial indicators. Particularly, we will be paying attention to National Instruments’ ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for National Instruments

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for National Instruments is:

9.1% = US$110m ÷ US$1.2b (Based on the trailing twelve months to March 2022).

The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.09 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficacy a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

National Instruments’ Earnings Growth And 9.1% ROE

When you first look at it, National Instruments’ ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 12% either. As a result, National Instruments reported a very low income growth of 2.9% over the past five years.

As a next step, we compared National Instruments’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 15% in the same period.

NasdaqGS:NATI Past Earnings Growth June 26th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about National Instruments’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is National Instruments Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 84% (that is, the company retains only 16% of its income) over the past three years for National Instruments suggests that the company’s earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, National Instruments has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 47% over the next three years. The fact that the company’s ROE is expected to rise to 23% over the same period is explained by the drop in the payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning National Instruments. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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.

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