With the share price down 48% in the past three months, it's easy to ignore Neuroscientific Biopharmaceuticals (ASX:NSB). However, the company's fundamentals appear to be fairly decent, and its long-term financial position is generally in line with future market price movements. In this article, we decided to focus on NeuroScientific Biopharmaceuticals's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
See the latest analysis on NeuroScientific Biopharmaceuticals.
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Neuroscientific Biopharmaceuticals is:
20% = AU$761,000 ÷ AU$3.8 million (Based on the trailing twelve months to December 2023).
“Revenue” is the income a company has earned over the past year. This means that for every A$1 a shareholder invests, the company will generate a profit of A$0.20 for him.
Why is ROE important for profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
Neuroscientific Biopharma Revenue Growth and ROE of 20%
First, NeuroScientific Biopharmaceuticals' ROE looks acceptable. His ROE for the company looks pretty good, especially when compared to the industry average of 8.7%. Needless to say, we were quite surprised to see that NeuroScientific Biopharmaceuticals' net income has declined at a rate of 14% over the past five years. We think there may be other factors at play here that are holding back the company's growth. For example, if a company pays out a large portion of its earnings as dividends or if it faces competitive pressures.
Having said that, we compared Neuroscientific Biopharmaceuticals' performance with the industry and found that while the company has shrunk its profits, the industry has grown profits at a rate of 13% over the same five-year period. I noticed that it was stretching and was concerned.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. If you're wondering about NeuroScientific Biopharmaceuticals's valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
NeuroScientific Are biopharmaceuticals making effective use of retained earnings?
NeuroScientific Biopharmaceuticals does not pay dividends. That means potentially all of the profits are reinvested back into the business, but if they were keeping all of the profits, that doesn't explain why the company's profits have declined. Therefore, there may be other factors at play here that could potentially inhibit growth. For example, businesses are facing some headwinds.
conclusion
Overall, it looks like there are some positive aspects to NeuroScientific Biopharmaceuticals' business. However, the low profit growth is a bit concerning, especially considering that the company has a high rate of return and reinvests a large portion of its profits. There may be other factors inhibiting growth that are not necessarily in control of your business at first glance. We don't want to completely fire the company, but we do try to see how risky the business is in order to make more informed decisions about the company. Our risks dashboard includes the three risks he identified for NeuroScientific Biopharmaceuticals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
