Most readers already know that OraSure Technologies (NASDAQ: OSUR) stock has risen significantly by 43% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In particular, we will pay particular attention to the ROE of OraSure Technologies today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for OraSure Technologies
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of OraSure Technologies is:
1.3% = US $ 5.3 million ÷ US $ 405 million (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 think about this is that for every dollar of equity, the company was able to make $ 0.01 in profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. 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.
A side-by-side comparison of OraSure Technologies’ 1.3% profit growth and ROE
As you can see, OraSure Technologies’ ROE seems quite low. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 34% drop in five-year net income observed by OraSure Technologies may have been the result of lower ROE. However, other factors can also lead to lower income. Such as – low profit retention or misallocation of capital.
So, in the next step, we compared the performance of OraSure Technologies to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate by 14% over the same period.
Profit growth is a huge factor in the valuation of stocks. 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. Is OraSure Technologies just valued over other companies? These 3 evaluation measures could help you decide.
Is OraSure Technologies Efficiently Reinvesting Its Profits?
Overall, we believe that the performance displayed by OraSure Technologies can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, we looked at current analysts’ estimates and found that analysts expect a slight improvement in the company’s earnings growth. Indeed, this could bring some relief to shareholders. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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