Should You Be Impressed By Amgen Inc.'s (NASDAQ:AMGN) ROE?

NASDAQ:AMGN).” data-reactid=”28″>One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. To keep the lesson grounded in practicality, we’ll use ROE to better understand Amgen Inc. (NASDAQ:AMGN).

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Amgen ” data-reactid=”30″> See our latest analysis for Amgen

How Do You Calculate Return On Equity?

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Amgen is:

68% = US$7.3b ÷ US$11b (Based on the trailing twelve months to June 2020).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.68.

Does Amgen Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. Pleasingly, Amgen has a superior ROE than the average (14%) in the Biotechs industry.

on our platform here.” data-reactid=”55″>That is a good sign. With that said, a high ROE doesn’t always indicate high profitability. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. You can see the 2 risks we have identified for Amgen by visiting our risks dashboard for free on our platform here.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. That will make the ROE look better than if no debt was used.

Combining Amgen’s Debt And Its 68% Return On Equity

We think Amgen uses a significant amount of debt to maximize its returns, as it has a significantly higher debt to equity ratio of 3.16. Its ROE is clearly quite good, but it seems to be boosted by the significant use of debt by the company.

Summary

Return on equity is one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have around the same level of debt to equity, and one has a higher ROE, I’d generally prefer the one with higher ROE.

report on analyst forecasts for the company.” data-reactid=”62″>But when a business is high quality, the market often bids it up to a price that reflects this. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company.

free list of interesting companies, that have HIGH return on equity and low debt.” data-reactid=”63″>If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.