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Clinuvel Pharmaceuticals' (ASX:CUV) stock is up by a considerable 6.8% 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. In this article, we decided to focus on Clinuvel Pharmaceuticals' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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How Is ROE Calculated?
Return on equity 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 Clinuvel Pharmaceuticals is:
18% = AU$39m ÷ AU$217m (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.18.
See our latest analysis for Clinuvel Pharmaceuticals
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
A Side By Side comparison of Clinuvel Pharmaceuticals' Earnings Growth And 18% ROE
At first glance, Clinuvel Pharmaceuticals seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Probably as a result of this, Clinuvel Pharmaceuticals was able to see a decent growth of 17% over the last five years.
Next, on comparing with the industry net income growth, we found that Clinuvel Pharmaceuticals' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
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. 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 Clinuvel Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.