Is Pfizer Inc.'s (NYSE:PFE) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Pfizer (NYSE:PFE) has had a great run on the share market with its stock up by a significant 6.8% over the last week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Pfizer's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Pfizer

How Do You 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 Pfizer is:

24% = US$16b ÷ US$65b (Based on the trailing twelve months to March 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.24.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Pfizer's Earnings Growth And 24% ROE

Firstly, we acknowledge that Pfizer has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. This likely paved the way for the modest 18% net income growth seen by Pfizer over the past five years. growth

As a next step, we compared Pfizer'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 13%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Pfizer fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Pfizer Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Pfizer suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Pfizer has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 54% of its profits over the next three years. Accordingly, forecasts suggest that Pfizer's future ROE will be 24% which is again, similar to the current ROE.

Summary

On the whole, we feel that Pfizer's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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.
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