Yahoo Finance Are Robust Financials Driving The Recent Rally In Clinuvel Pharmaceuticals Limited's (ASX:CUV) Stock?
Clinuvel Pharmaceuticals' (ASX:CUV) stock is up by a considerable 7.1% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Clinuvel 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Clinuvel 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 Clinuvel Pharmaceuticals is:
29% = AU$23m ÷ AU$78m (Based on the trailing twelve months to December 2020).
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$0.29 in profit.
What Has ROE Got To Do With 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.
Clinuvel Pharmaceuticals' Earnings Growth And 29% ROE
To begin with, Clinuvel Pharmaceuticals has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. Under the circumstances, Clinuvel Pharmaceuticals' considerable five year net income growth of 46% was to be expected.
As a next step, we compared Clinuvel 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 16%.
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. 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' three-year median payout ratio to shareholders is 6.6%, which is quite low. This implies that the company is retaining 93% of its profits. So it looks like Clinuvel Pharmaceuticals is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Clinuvel Pharmaceuticals has been paying dividends over a period of three 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 over the next three years is expected to be approximately 5.8%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 23%.
Summary
In total, we are pretty happy with Clinuvel Pharmaceuticals' performance. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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