In This Article:
With its stock down 18% over the past three months, it is easy to disregard NeuroScientific Biopharmaceuticals (ASX:NSB). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to NeuroScientific Biopharmaceuticals' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for NeuroScientific Biopharmaceuticals
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NeuroScientific Biopharmaceuticals is:
6.1% = AU$324k ÷ AU$5.4m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.06 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
NeuroScientific Biopharmaceuticals' Earnings Growth And 6.1% ROE
When you first look at it, NeuroScientific Biopharmaceuticals' ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.5%. Accordingly, NeuroScientific Biopharmaceuticals' low net income growth of 4.4% over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing with the industry net income growth, we found that NeuroScientific Biopharmaceuticals' reported growth was lower than the industry growth of 14% 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about NeuroScientific Biopharmaceuticals''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.