Clinuvel Pharmaceuticals Limited's (ASX:CUV) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Clinuvel Pharmaceuticals' (ASX:CUV) stock increased significantly by 22% over the past month. 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 Clinuvel Pharmaceuticals' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Clinuvel 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 Clinuvel Pharmaceuticals is:

19% = AU$31m ÷ AU$165m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.19 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 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.

A Side By Side comparison of Clinuvel Pharmaceuticals' Earnings Growth And 19% ROE

To begin with, Clinuvel Pharmaceuticals seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.6%. This probably laid the ground for Clinuvel Pharmaceuticals' moderate 14% net income growth seen over the past five years.

Next, on comparing Clinuvel Pharmaceuticals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Clinuvel Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.

Is Clinuvel Pharmaceuticals Efficiently Re-investing Its Profits?

Clinuvel Pharmaceuticals' three-year median payout ratio to shareholders is 6.9% (implying that it retains 93% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Clinuvel Pharmaceuticals is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 10% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Clinuvel Pharmaceuticals' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.