It’s hard to get excited when looking at Amazon.com’s (NASDAQ:AMZN) recent performance, as the stock is down 2.1% over the past month. However, share prices are usually driven by a company’s long-term financial performance, which in this case looks quite promising. In particular, we’ll be paying attention to Amazon.com’s return on equity today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investments it receives from its shareholders. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for Amazon.com
How do you calculate return on equity?
The Formula for return on equity Is:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Amazon.com is:
19% = $44 billion ÷ $236 billion (based on the trailing twelve months to June 2024).
“Return” refers to a company’s earnings over the last year. This means that for every dollar its shareholders invest, the company earned $0.19 in profit.
Why is return on equity (ROE) important for earnings growth?
We’ve already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Based on how much of its earnings the company reinvests or “retains,” we can then judge a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the return on equity and earnings retention, the higher a company’s growth rate will be compared to companies that don’t necessarily have these characteristics.
A comparison of Amazon.com’s earnings growth and return on equity (19%)
First of all, Amazon.com appears to have a respectable return on equity. And when we compared it to the industry, we found that the average return on equity in the industry is similar at 21%. This, among other factors, probably explains Amazon.com’s modest growth of 14% over the past five years.
We then compared Amazon.com’s net income growth to that of the industry and found that the company’s growth was in line with the average industry growth of 14% over the same 5-year period.
The basis for valuing a company depends heavily on its earnings growth. Next, investors need to determine whether the expected earnings growth, or lack thereof, is already factored into the stock price. This then helps them determine whether the stock is positioned for a good or bad future. Has the market priced in AMZN’s future prospects? Find out in our latest intrinsic value infographic research report.
Does Amazon.com use its retained earnings effectively?
Amazon.com does not pay regular dividends, which means that all profits are reinvested in the company, which also explains the significant earnings growth the company has recorded.
Diploma
Overall, we are very pleased with Amazon.com’s performance. We particularly like that the company is reinvesting heavily in its business at a high rate of return. Unsurprisingly, this has resulted in impressive earnings growth. With this in mind, the latest analyst forecasts show that the company will continue to see earnings growth. Are these analyst expectations based on broader expectations for the industry or on the company’s fundamentals? Click here to go to our analyst forecasts page for the company.
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