It is hard to get excited after looking at Selecta Biosciences’ (NASDAQ:SELB) recent performance, when its stock has declined 65% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Selecta Biosciences’ ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
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 Selecta Biosciences is:
50% = US$28m ÷ US$56m (Based on the trailing twelve months to March 2022).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.50 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. 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. 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.
A Side By Side comparison of Selecta Biosciences’ Earnings Growth And 50% ROE
Firstly, we acknowledge that Selecta Biosciences has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 22% also doesn’t go unnoticed by us. Probably as a result of this, Selecta Biosciences was able to see a decent net income growth of 10% over the last five years.
As a next step, we compared Selecta Biosciences’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 34% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Selecta Biosciences”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Selecta Biosciences Making Efficient Use Of Its Profits?
Given that Selecta Biosciences doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we feel that Selecta Biosciences’ performance has been quite good. 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 a good amount of growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings 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.