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With its stock down 26% over the past month, it is easy to disregard Entrada Therapeutics (NASDAQ:TRDA). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Entrada Therapeutics' ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Entrada Therapeutics
How Is ROE Calculated?
ROE 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 Entrada Therapeutics is:
13% = US$55m ÷ US$422m (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.
What Has ROE Got To Do With 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. 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.
Entrada Therapeutics' Earnings Growth And 13% ROE
To start with, Entrada Therapeutics' ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 18% does temper our expectations. That being the case, the significant five-year 28% net income growth reported by Entrada Therapeutics comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that Entrada Therapeutics' growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.