Are Strong Financial Prospects The Force That Is Driving The Momentum In Zebra Technologies Corporation's NASDAQ:ZBRA) Stock?

Most readers would already be aware that Zebra Technologies' (NASDAQ:ZBRA) stock increased significantly by 10% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Zebra Technologies' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Zebra Technologies

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 Zebra Technologies is:

27% = US$494m ÷ US$1.8b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zebra Technologies' Earnings Growth And 27% ROE

Firstly, we acknowledge that Zebra Technologies has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 9.6% also doesn't go unnoticed by us. As a result, Zebra Technologies' exceptional 70% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Zebra Technologies' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zebra Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Zebra Technologies Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that Zebra Technologies' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. 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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