Is NeuroScientific Biopharmaceuticals Limited's (ASX:NSB) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 19% over the past month, it is easy to disregard NeuroScientific Biopharmaceuticals (ASX:NSB). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to NeuroScientific Biopharmaceuticals' 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.

Check out our latest analysis for NeuroScientific Biopharmaceuticals

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for NeuroScientific Biopharmaceuticals is:

6.1% = AU$324k ÷ AU$5.4m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.06.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

NeuroScientific Biopharmaceuticals' Earnings Growth And 6.1% ROE

When you first look at it, NeuroScientific Biopharmaceuticals' ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.4%. Thus, the low net income growth of 4.4% seen by NeuroScientific Biopharmaceuticals over the past five years could probably be the result of the low ROE.

As a next step, we compared NeuroScientific Biopharmaceuticals' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 NeuroScientific Biopharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.

Is NeuroScientific Biopharmaceuticals Making Efficient Use Of Its Profits?

NeuroScientific Biopharmaceuticals doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. However, there's only been very little earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

On the whole, we feel that the performance shown by NeuroScientific Biopharmaceuticals can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for NeuroScientific Biopharmaceuticals visit our risks dashboard for free.

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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.