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Cipher Pharmaceuticals (TSE:CPH) has had a rough three months with its share price down 21%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Cipher Pharmaceuticals' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Cipher 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 Cipher Pharmaceuticals is:
16% = US$16m ÷ US$99m (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.16.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Cipher Pharmaceuticals' Earnings Growth And 16% ROE
To start with, Cipher Pharmaceuticals' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 5.9%. This certainly adds some context to Cipher Pharmaceuticals' exceptional 43% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Cipher Pharmaceuticals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 45% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Cipher Pharmaceuticals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.