It is hard to get excited after looking at Pfizer’s (NYSE:PFE) recent performance, when its stock has declined 8.9% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Pfizer’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How To 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 Pfizer is:
34% = US$30b ÷ US$87b (Based on the trailing twelve months to July 2022).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.34.
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. 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 Pfizer’s Earnings Growth And 34% ROE
Firstly, we acknowledge that Pfizer has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 19% also doesn’t go unnoticed by us. This likely paved the way for the modest 6.1% net income growth seen by Pfizer over the past five years. growth
As a next step, we compared Pfizer’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 8.6% 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). 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 Pfizer’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Pfizer Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Pfizer suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.
Additionally, Pfizer has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 42% over the next three years. Still forecasts suggest that Pfizer’s future ROE will drop to 16% even though the the company’s payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company’s ROE.
Overall, we feel that Pfizer certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here