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Amphastar Pharmaceuticals (NASDAQ:AMPH) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Amphastar Pharmaceuticals' ROE in this article.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Amphastar Pharmaceuticals
How To Calculate Return On Equity?
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 Amphastar Pharmaceuticals is:
23% = US$167m ÷ US$713m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.23.
What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Amphastar Pharmaceuticals' Earnings Growth And 23% ROE
To begin with, Amphastar Pharmaceuticals has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 21% also portrays the company's ROE in a good light. Given the circumstances, the significant 39% net income growth seen by Amphastar Pharmaceuticals over the last five years is not surprising.
When you consider the fact that the industry earnings have shrunk at a rate of 0.3% in the same 5-year period, the company's net income growth is pretty remarkable.
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. If you're wondering about Amphastar Pharmaceuticals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.