Cosmo Pharmaceuticals N.V.'s (VTX:COPN) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 17% over the past three months, it is easy to disregard Cosmo Pharmaceuticals (VTX:COPN). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Cosmo 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 Cosmo Pharmaceuticals

How Is ROE Calculated?

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 Cosmo Pharmaceuticals is:

3.8% = €18m ÷ €464m (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Cosmo Pharmaceuticals' Earnings Growth And 3.8% ROE

When you first look at it, Cosmo Pharmaceuticals' ROE doesn't look that attractive. 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 9.6%. Despite this, surprisingly, Cosmo Pharmaceuticals saw an exceptional 61% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Cosmo Pharmaceuticals' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Cosmo Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cosmo Pharmaceuticals Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 62% (implying that it keeps only 38% of profits) for Cosmo Pharmaceuticals suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Cosmo Pharmaceuticals is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 10% over the next three years. As a result, the expected drop in Cosmo Pharmaceuticals' payout ratio explains the anticipated rise in the company's future ROE to 10%, over the same period.

Summary

Overall, we feel that Cosmo Pharmaceuticals certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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