NeuroScientific Biopharmaceuticals (ASX:NSB) has had a rough three months with its share price down 24%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on NeuroScientific Biopharmaceuticals' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for NeuroScientific Biopharmaceuticals

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 NeuroScientific Biopharmaceuticals is:

20% = AU$761k ÷ AU$3.8m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.20 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

NeuroScientific Biopharmaceuticals' Earnings Growth And 20% ROE

At first glance, NeuroScientific Biopharmaceuticals seems to have a decent ROE. Especially when compared to the industry average of 8.9% the company's ROE looks pretty impressive. As you might expect, the 14% net income decline reported by NeuroScientific Biopharmaceuticals is a bit of a surprise. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared NeuroScientific Biopharmaceuticals' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same 5-year period.

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. Is NeuroScientific Biopharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.