Is Neurocrine Biosciences, Inc.'s (NASDAQ:NBIX) Latest Stock Performance Being Led By Its Strong Fundamentals?

Simply Wall St · 07/01 10:10

Most readers would already know that Neurocrine Biosciences' (NASDAQ:NBIX) stock increased by 3.0% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Neurocrine Biosciences' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Neurocrine Biosciences

How Is ROE Calculated?

ROE 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 Neurocrine Biosciences is:

15% = US$370m ÷ US$2.4b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Neurocrine Biosciences' Earnings Growth And 15% ROE

To start with, Neurocrine Biosciences' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining Neurocrine Biosciences' moderate 16% growth over the past five years amongst other factors.

Next, on comparing Neurocrine Biosciences' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% over the last few years.

past-earnings-growth
NasdaqGS:NBIX Past Earnings Growth July 1st 2024

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. 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 Neurocrine Biosciences is trading on a high P/E or a low P/E, relative to its industry.

Is Neurocrine Biosciences Making Efficient Use Of Its Profits?

Neurocrine Biosciences doesn't pay any regular dividends, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

Overall, we are quite pleased with Neurocrine Biosciences' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.