Will the weakness in shares of Northern Technologies International Corporation (NASDAQ:NTIC) prove temporary given the strong fundamentals?

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With its shares down 22% in the past three months, it’s easy to overlook Northern Technologies International (NASDAQ:NTIC). But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on Northern Technologies International DEER.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Northern Technologies International

How do you calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Northern Technologies International is:

13% = $9.1 million ÷ $69 million (based on trailing 12 months to February 2022).

The “yield” is the profit of the last twelve months. So, this means that for every $1 of investment by its shareholder, the company generates a profit of $0.13.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Earnings growth and ROE of 13% from Northern Technologies International

For starters, Northern Technologies International’s ROE looks acceptable. Even when compared to the industry average of 16%, the company’s ROE looks pretty decent. This certainly adds some context to Northern Technologies International’s moderate 5.9% net income growth seen over the past five years.

As a next step, we benchmarked Northern Technologies International’s net income growth against the industry and were disappointed to see that the company’s growth was below the industry average growth of 7.7% in during the same period.

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. A 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 outlook. So you might want check if Northern Technologies International is trading on a high P/E or on a low P/Ein relation to its industry.

Is Northern Technologies International using its retained earnings effectively?

Northern Technologies International has a healthy combination of a moderate three-year median payout ratio of 30% (or a retention rate of 70%) and respectable earnings growth, as seen above. meaning that the company has made effective use of its profits.

Additionally, Northern Technologies International has paid dividends over a four-year period, which means the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we believe Northern Technologies International’s performance has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. As a result, its decent revenue growth is not surprising. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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