editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
It is hard to get excited after looking at Inspire Medical Systems’ (NYSE:INSP) recent performance, when its stock has declined 12% over the past three months. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Inspire Medical Systems’ ROE in this article.
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.
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The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Inspire Medical Systems is:
7.8% = US$54m ÷ US$690m (Based on the trailing twelve months to December 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.08 in profit.
View our latest analysis for Inspire Medical Systems
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
On the face of it, Inspire Medical Systems’ ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 12% either. Despite this, surprisingly, Inspire Medical Systems saw an exceptional 34% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Inspire Medical Systems’ 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%.
