United Therapeutics Corporation (NASDAQ: UTHR) stock has experienced strong momentum: does this require further study of its financial outlook?
United Therapeutics (NASDAQ: UTHR) has had a strong run in the equity market with its stock rising significantly 10% in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will be paying close attention to the ROE of United Therapeutics today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, United Therapeutics’ ROE is:
13% = US $ 471 million ÷ US $ 3.6 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. Another way to look at this is that for every dollar of equity, the company was able to make $ 0.13 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
United Therapeutics profit growth and 13% ROE
For starters, United Therapeutics appears to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 20%. Needless to say, the 18% net income shrinkage rate observed by United Therapeutics over the past five years is a huge drag. Remember, the business has a high ROE to begin with, just that it’s lower than the industry average. So there may be other reasons why profits decrease. These include low profit retention or poor capital allocation.
So, in the next step, we compared the performance of United Therapeutics to that of the industry and were disappointed to find that if the company slashed its profits, the industry increased its profits at a rate of 23% at the time. during the same period.
NasdaqGS: UTHR Past Profit Growth September 28, 2021
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering about United Therapeutics’ valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is United Therapeutics Using Profits Effectively?
United Therapeutics does not pay any dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it cannot use them to grow its business. So there could be other explanations in this regard. For example, the business of the company can deteriorate.
Overall, we think United Therapeutics certainly has some positive factors to consider. However, although the company has a decent ROE and high profit retention, its profit growth figure is quite disappointing. This suggests that there could be an external threat to the business, hampering growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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