Can Mixed Fundamentals Have A Negative Impact on Elanco Animal Health Incorporated (NYSE:ELAN) Current Share Price Momentum?

Elanco Animal Health (NYSE:ELAN) has had a great run on the share market with its stock up by a significant 34% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Elanco Animal Health's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

ROE 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 Elanco Animal Health is:

6.1% = US$373m ÷ US$6.1b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.06 in profit.

Check out our latest analysis for Elanco Animal Health

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Elanco Animal Health's Earnings Growth And 6.1% ROE

On the face of it, Elanco Animal Health's ROE is not much to talk about. Next, when compared to the average industry ROE of 21%, the company's ROE leaves us feeling even less enthusiastic. As a result, Elanco Animal Health's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Elanco Animal Health's net income growth with the industry and discovered that the industry saw an average growth of 9.0% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Elanco Animal Health's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Elanco Animal Health Efficiently Re-investing Its Profits?

Elanco Animal Health doesn't pay any regular dividends, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? 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 Elanco Animal Health can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. 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.