New Zealand Markets closed
  • NZX 50

    12,036.05
    +12.59 (+0.10%)
     
  • NZD/USD

    0.6496
    +0.0003 (+0.05%)
     
  • NZD/EUR

    0.5970
    +0.0015 (+0.26%)
     
  • ALL ORDS

    7,709.50
    +21.50 (+0.28%)
     
  • ASX 200

    7,493.80
    +25.50 (+0.34%)
     
  • OIL

    79.38
    -1.63 (-2.01%)
     
  • GOLD

    1,943.90
    -2.80 (-0.14%)
     
  • NASDAQ

    12,166.60
    +115.12 (+0.96%)
     
  • FTSE

    7,765.15
    +4.04 (+0.05%)
     
  • Dow Jones

    33,978.08
    +28.67 (+0.08%)
     
  • DAX

    15,150.03
    +17.18 (+0.11%)
     
  • Hang Seng

    22,688.90
    +122.12 (+0.54%)
     
  • NIKKEI 225

    27,382.56
    +19.81 (+0.07%)
     
  • NZD/JPY

    84.3200
    -0.0940 (-0.11%)
     

Is The Market Rewarding Ciena Corporation (NYSE:CIEN) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

With its stock down 18% over the past three months, it is easy to disregard Ciena (NYSE:CIEN). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Ciena's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Ciena

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Ciena is:

7.4% = US$199m ÷ US$2.7b (Based on the trailing twelve months to July 2022).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.07 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Ciena's Earnings Growth And 7.4% ROE

At first glance, Ciena's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.8%. Given the circumstances, the significant decline in net income by 9.4% seen by Ciena over the last five years is not surprising. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Ciena's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 22% in the same period. This is quite worrisome.

past-earnings-growth
past-earnings-growth

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. Is CIEN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ciena Making Efficient Use Of Its Profits?

Ciena doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

In total, we're a bit ambivalent about Ciena's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here