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Is the market following strong financials?
Amazon.com (NASDAQ:AMZN) shares are up 9.0% over the past three months. Since the market typically pays for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In particular, we will be attentive Amazon.com ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability index that measures the rate of return on capital provided by the company’s shareholders.
See our latest review for Amazon.com
How is ROE calculated?
O formula for return on equity It is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Therefore, based on the above formula, Amazon.com’s ROE is:
17% = US$38 billion ÷ US$217 billion (based on trailing twelve months to March 2024).
The ‘return’ refers to a company’s profits over the last year. This means that for every $1 of equity, the company generated $0.17 in profit.
What does ROE have 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 can then assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Amazon.com Earnings Growth and 17% ROE
For starters, Amazon.com’s ROE looks acceptable. Additionally, the company’s ROE is similar to the industry average of 17%. This certainly adds some context to Amazon.com’s moderate 9.4% net profit growth seen over the past five years.
As a next step, we compared Amazon.com’s net profit growth to the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 14% over the same period.
past profit growth
Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will have an idea of whether the stock is headed for clear blue waters or if swampy waters await. Has the market priced in the future prospects for AMZN? You can find out at our latest intrinsic value infographic research report.
Is Amazon.com Using Its Retained Profits Effectively?
Given that Amazon.com does not pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to expand its business.
The story continues
Conclusion
In total, we are very pleased with Amazon.com’s performance. Particularly, we like that the company is reinvesting heavily in its business and with a high rate of return. As a result, its decent earnings growth is not surprising. Therefore, the latest analyst forecasts show that the company will continue to record an expansion in its profits. To learn more about the company’s future earnings growth forecasts, take a look at this free report on analyst forecasts for the company to find out more.
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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 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 into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.