REGENXBIO Inc.'s (NASDAQ:RGNX) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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REGENXBIO (NASDAQ:RGNX) has had a rough month with its share price down 19%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study REGENXBIO’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for REGENXBIO

How Do You Calculate Return On 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 REGENXBIO is:

17% = US$128m ÷ US$764m (Based on the trailing twelve months to December 2021).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.17 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

REGENXBIO’s Earnings Growth And 17% ROE

To begin with, REGENXBIO seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. As you might expect, the 17% net income decline reported by REGENXBIO is a bit of a surprise. So, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared REGENXBIO’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 29% in the same period. This is quite worrisome.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about REGENXBIO’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is REGENXBIO Efficiently Re-investing Its Profits?

REGENXBIO doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

Overall, we feel that REGENXBIO certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. In addition, on studying the latest analyst forecasts, we found that the company’s earnings are expected to continue to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.