The shares of First Solar, Inc. (NASDAQ:FSLR) Going Strong: Is the Market Following Fundamentals?

Most readers will already be aware that shares of First Solar (NASDAQ:FSLR) are up significantly by 25% over the past three months. Given that the market rewards strong financial values ​​over the long term, we wonder if that is the case in this case. Specifically, we decided to study First Solar’s ROE in this article.

ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability relative to its equity.

Check out our latest analysis for First Solar

How to calculate return on equity?

The formula for ROE is:

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

Based on the above formula, the ROE for First Solar is:

12% = US$831 million ÷ US$6.7 billion (based on trailing twelve months to December 2023).

The ‘return’ is the profit over the past twelve months. That means that for every $1 of equity, the company generated $0.12 in profit.

What is the relationship between ROE and earnings growth?

We’ve already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Depending on how much of these profits the company reinvests or ‘retains’, and how effectively it does so, we can 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 have these characteristics.

First Solar earnings growth and 12% ROE

For starters, First Solar appears to have a respectable ROE. And when comparing to the industry, we found that the average industry ROE is similar at 13%. Consequently, this has likely laid the foundation for the impressive 29% net income growth that First Solar has seen over the past five years. We believe that there may also be other aspects that positively influence the company’s earnings growth. For example, the company has a low payout ratio or is efficiently managed.

As a next step, we compared First Solar’s net income growth with that of the industry and found that the company has a similar growth rate compared to the industry’s average growth rate of 30% over the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock has a bright or bleak future. Is FSLR valued fairly? This infographic on the company’s intrinsic value contains everything you need to know.

Does First Solar use its profits efficiently?

Since First Solar does not pay out regular dividends to its shareholders, we can conclude that the company has reinvested all its profits to grow its business.

Resume

Overall, we believe First Solar’s performance has been quite good. We especially like that the company is reinvesting heavily in its operations, and at a high rate of return. Unsurprisingly, this has led to impressive earnings growth. When examining current analyst estimates, we found that analysts expect the company to continue its recent growth rates. If you want to know more about the company’s future earnings growth forecasts, you can take a look here free report on analyst forecasts for the company for more information.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.