Most readers would already know that Pinterest’s (NYSE:PINS) stock increased by 4.3% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to investigate if the company’s decent financials had a hand to play in the recent price move. In this article, we decided to focus on Pinterest’s ROE.
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 Pinterest
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Pinterest is:
6.0% = US$192m ÷ US$3.2b (Based on the trailing twelve months to June 2024).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
On the face of it, Pinterest’s ROE is not much to talk about. However, its ROE is similar to the industry average of 6.7%, so we won’t completely dismiss the company. Particularly, the exceptional 58% net income growth seen by Pinterest over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Pinterest’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 9.1%.
Earnings growth is a huge factor in stock valuation. 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 Pinterest is trading on a high P/E or a low P/E, relative to its industry.
