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ACADIA Pharmaceuticals (NASDAQ:ACAD) has had a rough three months with its share price down 19%. 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 ACADIA 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You 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 ACADIA Pharmaceuticals is:
31% = US$226m ÷ US$733m (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 $0.31.
View our latest analysis for ACADIA Pharmaceuticals
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
ACADIA Pharmaceuticals' Earnings Growth And 31% ROE
To begin with, ACADIA Pharmaceuticals has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. So, the substantial 41% net income growth seen by ACADIA Pharmaceuticals over the past five years isn't overly surprising.
We then compared ACADIA Pharmaceuticals' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is ACADIA Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.