Many investors are still learning about the various metrics that can be useful when ***ysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Amgen Inc. (NASDAQ:AMGN).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the Profitability of a company in relation to its equity capital.

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 Amgen is:

75% = US$3.8b ÷ US$5.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.75.

Does Amgen H***e A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the ***erage for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, Amgen has a superior ROE than the ***erage (15%) in the Biotechs industry.

NasdaqGS:AMGN Return on Equity May 27th 2024

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 de*** which may boost its ROE but the high leverage puts the company at risk. Our risks dashboardshould h***e the 3 risks we h***e identified for Amgen.

The Importance Of De*** To Return On Equity

Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of de*** will improve the returns, but will not change the equity. That will make the ROE look better than if no de*** was used.

Combining Amgen's De*** And Its 75% Return On Equity

It ***ears that Amgen makes extensive use of de*** to improve its returns, because it has an alarmingly high de*** to equity ratio of 12.75. While its ROE is no dou*** quite impressive, it could give a false impression about the company's returns given that its huge de*** could be boosting those returns.

Conclusion

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies h***e high return on equity, despite low de***. If Two companies h***e the same ROE, then I would generally prefer the one with less de***.

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 you might want to check this FREE visualization of ***yst forecasts for the company.

But note: Amgen may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low de***.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and ***yst 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 ***ysis driven by fundamental data. Note that our ***ysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.