Is Cirrus Logic, Inc.'s (NASDAQ:CRUS) Recent Stock Performance Tethered To Its Strong Fundamentals?
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Cirrus Logic (NASDAQ:CRUS) has had a great run on the share market with its stock up by a significant 18% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Cirrus Logic's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
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 Cirrus Logic is:
17% = US$332m ÷ US$1.9b (Based on the trailing twelve months to March 2025).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.17 in profit.
See our latest analysis for Cirrus Logic
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Cirrus Logic's Earnings Growth And 17% ROE
To start with, Cirrus Logic's ROE looks acceptable. On comparing with the average industry ROE of 12% the company's ROE looks pretty remarkable. This certainly adds some context to Cirrus Logic's decent 8.6% net income growth seen over the past five years.
We then compared Cirrus Logic's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is CRUS fairly valued? This infographic on the company's intrinsic value has everything you need to know.