Yahoo Finance Vertex Pharmaceuticals Incorporated's (NASDAQ:VRTX) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Vertex Pharmaceuticals (NASDAQ:VRTX) has had a great run on the share market with its stock up by a significant 14% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Vertex Pharmaceuticals' ROE today.
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 Vertex Pharmaceuticals
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 Vertex Pharmaceuticals is:
23% = US$3.3b ÷ US$14b (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.23 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. 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 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.
Vertex Pharmaceuticals' Earnings Growth And 23% ROE
Firstly, we acknowledge that Vertex Pharmaceuticals has a significantly high ROE. Further, even comparing with the industry average if 21%, the company's ROE is quite respectable. Therefore, it might not be wrong to say that the impressive five year 23% net income growth seen by Vertex Pharmaceuticals was probably achieved as a result of the high ROE.
Next, on comparing with the industry net income growth, we found that Vertex Pharmaceuticals' reported growth was lower than the industry growth of 31% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is VRTX worth today? The intrinsic value infographic in our free research report helps visualize whether VRTX is currently mispriced by the market.
Is Vertex Pharmaceuticals Using Its Retained Earnings Effectively?
Given that Vertex Pharmaceuticals doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
On the whole, we feel that Vertex Pharmaceuticals' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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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