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ProPhase Labs, Inc.'s (NASDAQ:PRPH) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

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With its stock down 17% over the past month, it is easy to disregard ProPhase Labs (NASDAQ:PRPH). 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. Particularly, we will be paying attention to ProPhase Labs' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for ProPhase Labs

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for ProPhase Labs is:

11% = US$6.3m ÷ US$59m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

ProPhase Labs' Earnings Growth And 11% ROE

To start with, ProPhase Labs' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. This certainly adds some context to ProPhase Labs' moderate 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that ProPhase Labs' growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is ProPhase Labs fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ProPhase Labs Making Efficient Use Of Its Profits?

Conclusion

On the whole, we feel that ProPhase Labs' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for ProPhase Labs visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 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.