editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
With its stock down 24% over the past month, it is easy to disregard Pinterest (NYSE:PINS). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Pinterest’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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:
39% = US$1.9b ÷ US$4.8b (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 $0.39 in profit.
View our latest analysis for Pinterest
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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.
Firstly, we acknowledge that Pinterest has a significantly high ROE. Additionally, the company’s ROE is higher compared to the industry average of 8.5% which is quite remarkable. So, the substantial 64% net income growth seen by Pinterest over the past five years isn’t overly surprising.
Next, on comparing with the industry net income growth, we found that Pinterest’s growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Pinterest fairly valued compared to other companies? These 3 valuation measures might help you decide.
