Are you influenced by the recent stock performance of Advanced Micro Devices, Inc.? (NASDAQ:AMD) affect its basic parameters in any way?

Shares of Advanced Micro Devices ( NASDAQ:AMD ) are up a significant 30% over the past month. We wonder if and what role a company’s financials play in this price change, since a company’s long-term fundamentals usually determine market performance. We’ll be paying attention to Advanced Micro Devices’ ROE in particular today.

ROE, or return on equity, is a useful tool for assessing how effectively a company can generate a return on the investment it receives from its shareholders. In short, ROE shows the profit each dollar generates relative to shareholder investment.

See our latest analysis for Advanced Micro Devices

How to calculate return on equity?

The return on equity formula Is:

Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity

So based on the above formula, the ROE for Advanced Micro Devices is:

4.2% = USD 2.3 billion ÷ USD 55 billion (Based on the trailing twelve months to September 2022).

Your ‘return’ is the amount you have earned after tax over the last twelve months. Another way to think about it is that for every $1 of shareholders’ equity, the company was able to earn $0.04 in profit.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on how much of the profits a company chooses to reinvest or “retain”, we are able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are usually those that have a higher growth rate compared to companies that do not have the same characteristics.

Advanced Micro Devices earnings growth and 4.2% ROE

At first glance, Advanced Micro Devices’ ROE doesn’t have much to say. A quick further examination shows that the company’s ROE also does not compare favorably to the industry average of 19%. Still, surprisingly, Advanced Micro Devices has seen exceptional net income growth of 59% over the last five years. Therefore, there may be other aspects that have a positive impact on the company’s earnings growth. Such as – maintaining a high level of profits or effective management.

As a next step, we compared Advanced Micro Devices’ net income growth with the industry and were pleased to find that the growth recorded by the company is higher than the industry average growth of 28%.

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine whether the stock is destined for a bright or bleak future. How much is AMD worth today? The intrinsic value infographic in our free research report helps you visualize whether AMD is currently mispriced by the market.

Is Advanced Micro Devices using its profits effectively?

Advanced Micro Devices does not pay dividends to its shareholders, which means the company reinvests all of its profits into the business. This is likely the reason for the high earnings growth mentioned above.

summary

Overall, it looks like Advanced Micro Devices has some positive aspects to its business. Despite the low rate of return, the fact that the company reinvests a very large portion of its profits into its operations has undoubtedly contributed to the high profit growth. Therefore, analysis of the latest analyst forecasts indicates that the company may expect a slowdown in earnings growth in the future. To learn more about the company’s future earnings growth forecasts, take a look at this free report on analyst forecasts for the company to learn more.

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

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