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Is Weakness In Cognex Corporation (NASDAQ:CGNX) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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Cognex (NASDAQ:CGNX) has had a rough three months with its share price down 25%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Cognex’s 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.

Check out our latest analysis for Cognex

How To 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 Cognex is:

20% = US$277m ÷ US$1.4b (Based on the trailing twelve months to April 2022).

The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently 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. 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.

Cognex’s Earnings Growth And 20% ROE

At first glance, Cognex seems to have a decent ROE. Especially when compared to the industry average of 12% the company’s ROE looks pretty impressive. This certainly adds some context to Cognex’s decent 8.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Cognex’s reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. What is CGNX worth today? The intrinsic value infographic in our free research report helps visualize whether CGNX is currently mispriced by the market.

Is Cognex Making Efficient Use Of Its Profits?

Cognex’s three-year median payout ratio to shareholders is 18% (implying that it retains 82% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Cognex has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 12% over the next three years. However, the company’s ROE is not expected to change by much despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Cognex’s performance. 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 respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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