With its stock down 56% over the past three months, it is easy to disregard Biofrontera (ETR:B8FK). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Biofrontera's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Biofrontera
How Is ROE Calculated?
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 Biofrontera is:
2.3% = €398k ÷ €17m (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.02 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
Biofrontera's Earnings Growth And 2.3% ROE
It is quite clear that Biofrontera's ROE is rather low. Even compared to the average industry ROE of 9.7%, the company's ROE is quite dismal. As a result, Biofrontera's flat earnings over the past five years doesn't come as a surprise given its lower ROE.
Next, on comparing with the industry net income growth, we found that Biofrontera's reported growth was lower than the industry growth of 8.4% over the last few years, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Biofrontera's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.