editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
It is hard to get excited after looking at Bioxyne’s (ASX:BXN) recent performance, when its stock has declined 14% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Bioxyne’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.
Our free stock report includes 3 warning signs investors should be aware of before investing in Bioxyne. Read for free now.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Bioxyne is:
36% = AU$2.5m ÷ AU$6.9m (Based on the trailing twelve months to December 2024).
The ‘return’ is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.36 in profit.
Check out our latest analysis for Bioxyne
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
To begin with, Bioxyne has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 10.0% which is quite remarkable. For this reason, Bioxyne’s five year net income decline of 48% raises the question as to why the high ROE didn’t translate into earnings growth. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
So, as a next step, we compared Bioxyne’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.6% over the last few years.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Bioxyne fairly valued compared to other companies? These 3 valuation measures might help you decide.
