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Kiniksa Pharmaceuticals' (NASDAQ:KNSA) stock is up by a considerable 10% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Kiniksa Pharmaceuticals' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Kiniksa Pharmaceuticals
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kiniksa Pharmaceuticals is:
56% = US$231m ÷ US$412m (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.56.
What Has ROE Got To Do With 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. 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.
Kiniksa Pharmaceuticals' Earnings Growth And 56% ROE
First thing first, we like that Kiniksa Pharmaceuticals has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. As a result, Kiniksa Pharmaceuticals' exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Kiniksa Pharmaceuticals' 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 23%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kiniksa Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.