Yahoo Finance Neurocrine Biosciences, Inc.'s (NASDAQ:NBIX) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Most readers would already be aware that Neurocrine Biosciences' (NASDAQ:NBIX) stock increased significantly by 10% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Neurocrine Biosciences' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Neurocrine Biosciences
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 Neurocrine Biosciences is:
3.8% = US$58m ÷ US$1.5b (Based on the trailing twelve months to September 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.04 in profit.
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. 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 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.
Neurocrine Biosciences' Earnings Growth And 3.8% ROE
It is hard to argue that Neurocrine Biosciences' ROE is much good in and of itself. Not just that, even compared to the industry average of 25%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Neurocrine Biosciences grew its net income at a significant rate of 51% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Neurocrine Biosciences' 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 28%.
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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Neurocrine Biosciences''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Neurocrine Biosciences Making Efficient Use Of Its Profits?
Neurocrine Biosciences doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.
Conclusion
On the whole, we do feel that Neurocrine Biosciences has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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