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It is hard to get excited after looking at Regeneron Pharmaceuticals' (NASDAQ:REGN) recent performance, when its stock has declined 32% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Regeneron Pharmaceuticals' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Regeneron Pharmaceuticals
How Is ROE Calculated?
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 Regeneron Pharmaceuticals is:
16% = US$4.7b ÷ US$29b (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.16.
What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Regeneron Pharmaceuticals' Earnings Growth And 16% ROE
To start with, Regeneron Pharmaceuticals' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 18%. Consequently, this likely laid the ground for the decent growth of 7.3% seen over the past five years by Regeneron Pharmaceuticals.
We then compared Regeneron Pharmaceuticals' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 22% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Regeneron Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.