In This Article:
PharmX Technologies' (ASX:PHX) stock is up by a considerable 17% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to PharmX Technologies' 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 PharmX Technologies
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for PharmX Technologies is:
1.6% = AU$263k ÷ AU$16m (Based on the trailing twelve months to December 2023).
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$0.02 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
PharmX Technologies' Earnings Growth And 1.6% ROE
It is quite clear that PharmX Technologies' ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. In spite of this, PharmX Technologies was able to grow its net income considerably, at a rate of 43% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared PharmX Technologies' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 25%.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about PharmX Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.