Stock Analysis

Is Weakness In Abiomed, Inc. (NASDAQ:ABMD) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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NasdaqGS:ABMD
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Abiomed (NASDAQ:ABMD) has had a rough three months with its share price down 1.2%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Abiomed's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Abiomed

How Is ROE Calculated?

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 Abiomed is:

18% = US$208m ÷ US$1.2b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.18 in profit.

What Is The Relationship Between ROE And 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.

Abiomed's Earnings Growth And 18% ROE

To begin with, Abiomed seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. Probably as a result of this, Abiomed was able to see an impressive net income growth of 27% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Abiomed's 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 16%.

past-earnings-growth
NasdaqGS:ABMD Past Earnings Growth December 7th 2020

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Abiomed is trading on a high P/E or a low P/E, relative to its industry.

Is Abiomed Using Its Retained Earnings Effectively?

Conclusion

In total, we are pretty happy with Abiomed's performance. 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. 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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