Endymed (TLV: ENDY) stock has risen 13% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. Specifically, we decided to study Endymed’s ROE in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Endymed
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Endymed is:
16% = US $ 1.7 million Ã· US $ 10 million (based on the last twelve months up to June 2021).
The âreturnâ is the amount earned after tax over the past twelve months. This therefore means that for every 1 of its shareholder’s investments, the company generates a profit of âª 0.16.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Endymed profit growth and 16% ROE
At first glance, Endymed appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 13%. This certainly adds context to Endymed’s exceptional 65% net profit growth seen over the past five years. We believe there could be other factors at play here as well. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Endymed’s net income growth with the industry, and luckily, we found that the growth observed by the company is above the industry average growth of 44%.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. A 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 outlook. So, you might want to check whether Endymed is trading high P / E or low P / E, relative to its industry.
Is Endymed using its retained earnings effectively?
Endymed does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.
Overall, we are quite happy with the performance of Endymed. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should keep themselves informed of the risks involved before investing in a business. To know the 2 risks that we have identified for Endymed, visit our free risk dashboard.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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