Globus Medical, Inc. (NYSE: GMED) stock on an uptrend: Could fundamentals be driving momentum?
Most readers already know that Globus Medical (NYSE: GMED) stock has risen significantly 12% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will be paying close attention to the ROE of Globus Medical today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Globus Medical
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, Globus Medical’s ROE is:
11% = US $ 184 million Ã· US $ 1.6 billion (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.11 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ 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.
Globus Medical profit growth and 11% ROE
At first glance, Globus Medical appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 11%. Globus Medical’s decent returns are not reflected in Globus Medical’s five-year average net income growth of 4.1%. Thus, there could be other factors at play that could impact the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
Then, comparing with the industry’s net income growth, we found that Globus Medical’s reported growth was lower than the industry’s growth by 14% over the same period, which is not something we love to see.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Globus Medical is trading high P / E or low P / E, relative to its industry.
Is Globus Medical using its profits effectively?
Overall, we think Globus Medical has some positive attributes. However, we are disappointed to see a lack of earnings growth despite a high ROE and a high reinvestment rate. We believe there could be external factors that could negatively impact the business. However, the latest analyst forecasts show that the company will continue to see its profits increase. 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 the mentioned stocks.
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