Clinuvel Pharmaceuticals’ (ASX:CUV) stock is up by a considerable 8.7% 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. Specifically, we decided to study Clinuvel Pharmaceuticals’ ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Clinuvel Pharmaceuticals
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 Clinuvel Pharmaceuticals is:
17% = AU$30m ÷ AU$179m (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.17 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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 bear these characteristics.
A Side By Side comparison of Clinuvel Pharmaceuticals’ Earnings Growth And 17% ROE
At first glance, Clinuvel Pharmaceuticals seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.2%. Probably as a result of this, Clinuvel Pharmaceuticals was able to see a decent growth of 14% over the last five years.
As a next step, we compared Clinuvel Pharmaceuticals’ net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 13% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. 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 Clinuvel Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.
Is Clinuvel Pharmaceuticals Efficiently Re-investing Its Profits?
Clinuvel Pharmaceuticals has a low three-year median payout ratio of 6.9%, meaning that the company retains the remaining 93% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Clinuvel Pharmaceuticals has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 10% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Conclusion
On the whole, we feel that Clinuvel Pharmaceuticals’ performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
