Most readers would already know that Swedish Orphan Biovitrum’s (STO:SOBI) stock increased by 7.7% over the past three months. Given its impressive performance, we decided to study the company’s key financial indicators as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Swedish Orphan Biovitrum’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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Swedish Orphan Biovitrum

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Swedish Orphan Biovitrum is:

11% = kr3.2b ÷ kr28b (Based on the trailing twelve months to March 2023).

The ‘return’ is the yearly profit. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Swedish Orphan Biovitrum’s Earnings Growth And 11% ROE

To start with, Swedish Orphan Biovitrum’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 11%. Despite the moderate return on equity, Swedish Orphan Biovitrum has posted a net income growth of 4.6% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing Swedish Orphan Biovitrum’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 4.6% in the same period.

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. 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 Swedish Orphan Biovitrum is trading on a high P/E or a low P/E, relative to its industry.

Is Swedish Orphan Biovitrum Efficiently Re-investing Its Profits?

Swedish Orphan Biovitrum doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, there’s only been very little earnings growth to show for it. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

On the whole, we feel that Swedish Orphan Biovitrum’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.