Nasdaq Today – Could The Market Be Wrong About LifeVantage Corporation (NASDAQ:LFVN) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at LifeVantage’s (NASDAQ:LFVN) recent performance, when its stock has declined 14% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on LifeVantage’s 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Check out our latest analysis for LifeVantage
How To Calculate Return On Equity?
ROE 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 LifeVantage is:
33% = US$12m ÷ US$36m (Based on the trailing twelve months to December 2020).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.33 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
LifeVantage’s Earnings Growth And 33% ROE
To begin with, LifeVantage has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 15% which is quite remarkable. As a result, LifeVantage’s exceptional 29% net income growth seen over the past five years, doesn’t come as a surprise.
We then compared LifeVantage’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 4.6% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about LifeVantage’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is LifeVantage Making Efficient Use Of Its Profits?
Overall, we are quite pleased with LifeVantage’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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