In This Article:
Medigene (ETR:MDG1) has had a great run on the share market with its stock up by a significant 15% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Medigene's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Medigene
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 Medigene is:
16% = €9.6m ÷ €59m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.16 in profit.
What Is The Relationship Between ROE And 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. 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.
Medigene's Earnings Growth And 16% ROE
To begin with, Medigene seems to have a respectable ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. This certainly adds some context to Medigene's moderate 9.2% net income growth seen over the past five years.
As a next step, we compared Medigene's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 Medigene's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Medigene Using Its Retained Earnings Effectively?
Given that Medigene doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.