Yahoo Finance Amphastar Pharmaceuticals, Inc.'s (NASDAQ:AMPH) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
Amphastar Pharmaceuticals (NASDAQ:AMPH) has had a rough three months with its share price down 19%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Amphastar Pharmaceuticals' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Amphastar Pharmaceuticals
How Is ROE Calculated?
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 Amphastar Pharmaceuticals is:
22% = US$138m ÷ US$639m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.22 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Amphastar Pharmaceuticals' Earnings Growth And 22% ROE
At first glance, Amphastar Pharmaceuticals seems to have a decent ROE. On comparing with the average industry ROE of 18% the company's ROE looks pretty remarkable. This certainly adds some context to Amphastar Pharmaceuticals' exceptional 42% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Amphastar Pharmaceuticals' 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 0.5%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Amphastar Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.
Is Amphastar Pharmaceuticals Efficiently Re-investing Its Profits?
Given that Amphastar Pharmaceuticals doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
On the whole, we feel that Amphastar Pharmaceuticals' 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. 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.
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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.
