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Amphastar Pharmaceuticals (NASDAQ:AMPH) has had a rough three months with its share price down 35%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Amphastar Pharmaceuticals' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To Calculate Return On Equity?

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 Amphastar Pharmaceuticals is:

22% = US$160m ÷ US$732m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

See our latest analysis for Amphastar Pharmaceuticals

Why Is ROE Important For Earnings Growth?

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

Amphastar Pharmaceuticals' Earnings Growth And 22% ROE

To start with, Amphastar Pharmaceuticals' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 21%. Consequently, this likely laid the ground for the impressive net income growth of 42% seen over the past five years by Amphastar Pharmaceuticals. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Amphastar Pharmaceuticals' growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.