Amazon.com, Inc.'s (NASDAQ:AMZN) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Simply Wall St

September 29, 2022 at 7:00 AM·3 min read

Most readers would already be aware that Amazon.com's (NASDAQ:AMZN) stock increased significantly by 11% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Amazon.com's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Amazon.com

How Do You 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 Amazon.com is:

8.8% = US$12b ÷ US$131b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Amazon.com's Earnings Growth And 8.8% ROE

When you first look at it, Amazon.com's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 13%. In spite of this, Amazon.com was able to grow its net income considerably, at a rate of 36% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Amazon.com'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 23% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Amazon.com fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Amazon.com Using Its Retained Earnings Effectively?

Given that Amazon.com doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Amazon.com certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

TODAY
Sheinelle Jones takes trip home to Kansas for Mother’s Day: ‘I’ve been so homesick’
TODAY host Sheinelle Jones celebrated Mother's Day with a gift to herself: a trip back home to Wichita, Kansas.
AFP
Rivers rise again as rain batters flood-hit south Brazil
River levels rose again Sunday as strong rains lashed waterlogged southern Brazil, where flooding has killed 145 people and forced hundreds of thousands from their homes.A total of 132 people have been reported missing and 619,000 have been forced from their homes, civil defense officials said in an update Sunday evening.
Reuters
Floods kill 37 in Indonesia's West Sumatra, 17 missing
Flash floods and mud slides in Indonesia's West Sumatra province killed at least 37 people this weekend while the search for 17 missing people is still ongoing, authorities said on Monday. Torrential rain on Saturday evening caused flash floods, landslides, and cold lava flow, which is a mixture of volcanic ash, rock debris and water that flows like mud, in three districts in West Sumatra province, Abdul Malik, the chief of the provincial rescue team told Reuters. The cold lava flow, known in Indonesia as a lahar, came from Mount Marapi, one of Sumatra's most active volcanoes.
Reuters
Indian election enters fourth phase as rhetoric over religion, inequality sharpens
India voted on Monday in the fourth phase of a seven-week long general election, as campaign rhetoric became more strident over economic disparities and religious divisions. The world's most populous nation began voting on April 19 in a seven-phase election in which nearly one billion people are eligible to vote, with ballots set to be counted on June 4. Prime Minister Narendra Modi is seeking a rare, third straight term in a vote which pits his Hindu nationalist Bharatiya Janata Party (BJP) against an alliance of more than two dozen opposition parties, including main rival Congress.
AFP
Cambodia's famed Kampot pepper withers in scorching heatwave
Farmer Chhim Laem shakes his head as he walks between long rows of dead bushes, their brown leaves scorched by heat and drought that have devastated Cambodia's famed Kampot pepper crop.The Kampot region produced about 120 tonnes of peppercorns last year, but farmers say that excessive heat and rain have made 2024 the worst on record.
NBC News
GOP Sen. JD Vance says he will accept results if the election is 'free and fair'
Potential vice presidential contender Sen. JD Vance said Sunday that he would "totally plan" to accept the 2024 presidential election results — if the election is "free and fair."
CNN
Biden faces bipartisan backlash on Capitol Hill over Israel ultimatum
Lawmakers in Washington, DC, on Sunday weighed in on President Joe Biden’s ultimatum last week on CNN that an Israeli invasion of Rafah would cause him to pause certain weapons transfers.
CNN
Former US Marine pilot arrested in Australia worked with Chinese hacker unknowingly, lawyer says
Daniel Duggan, a naturalized Australian citizen, feared requests by Western intelligence agencies for sensitive information were putting his family at risk, according to his lawyer.
NBC News
Exiled Chinese billionaire's alleged accomplice pleads guilty in massive fraud conspiracy
Yvette Wang, an accomplice of indicted Chinese billionaire Guo Wengui, pleaded guilty in New York last week to defrauding investors out of over $1 billion dollars in "a complex scheme," prosecutors said.
AFP
Trump criminal trial braces for Michael Cohen testimony
Donald Trump's criminal trial in New York was expected to hear his former lawyer turned tormentor Michael Cohen testify Monday about his role in what prosecutors say was a cover up of payments to hide an affair.Daniels, who claims to have had sex with Trump in 2006, denied she threatened him if he did not buy her silence for $130,000, a payment that prosecutors say Trump then covered up.
AFP
Archegos founder to go on trial for fraud, market manipulation
Archegos founder Bill Hwang will go on trial Monday for alleged securities fraud and market manipulation, prosecutors said, following the fund's spectacular 2021 implosion that cost large banks billions of dollars.A searing 59-page indictment said Hwang and Halligan used the firm "as an instrument of market manipulation and fraud, with far-reaching consequences for other participants in the United States securities markets," according to the indictment.
AFP
Attacking birth control pills, US influencers push misinformation
US wellness influencers are increasingly targeting birth control pills, pushing their followers to abandon the contraceptives with false claims about infertility and low libido that researchers say leave them vulnerable to unintended pregnancies."People don't realize that many of these influencers have their own financial incentives for pushing false or misleading narratives that also don't prioritize the health of the people they're targeting," Sherman said.
AFP
At 101, a US WWII veteran - and pacifist - is honored by France
In his 101 years on Earth, Jack Hausman has seen a lot: eight decades ago he endured the battlefields of World War II before returning home and taking over the family business, all the while remaining a lifelong pacifist.Taking over the family business -- and helping build it into one of the largest makers of corrugated cardboard boxes on the East Coast -- Hausman finally retired in 2020 at the ripe old age of 98.
TODAY
Jenna Bush Hager shares family pics of Easter celebrations and 'church antics'
Jenna Bush Hager has three kids with her husband, Henry. Here's everything to know about their children, Mila, Poppy and Hal.
CNN
China’s Xi Jinping highlights Europe’s divisions ahead of expected Putin visit
Xi Jinping ended his European trip by projecting a stark message: that despite frictions with much of the continent, China still has fans in some European capitals.
AFP
Mercedes workers in Alabama to vote whether to join US union
The US auto workers union's drive to organize auto plants in the southern United States faces a second test this week at Mercedes-Benz in Alabama following a triumph last month.Some 5,200 workers at the Mercedes auto manufacturing plant and battery complex near Tuscaloosa, Alabama will decide whether to join the United Auto Workers in a federally-administered election that runs from Monday through Friday.
CNN
Manhunt after an Ohio police officer was killed ends in suspect’s death after a standoff, authorities say
A suspect was found dead Sunday in northeastern Ohio following a manhunt and hourslong standoff with law enforcement after a police officer was fatally shot in an ambush the day before, authorities say.
AFP
Blinken: Israel offensive on Rafah would not eliminate Hamas
An all-out Israeli offensive on the Gaza city of Rafah would provoke "anarchy" without eliminating Hamas, US Secretary of State Antony Blinken said Sunday, as Washington stepped up a pressure campaign against such an assault.- Death toll tops 35,000 - Blinken also spoke Sunday with Israeli Defense Minister Yoav Gallant, insisting again the United States opposed a major Israel ground operation in Rafah, the State Department said.
TODAY
Savannah Guthrie shares photos of her mom and daughter Vale for Mother’s Day: ‘God’s first, best and most important gift’
Savannah Guthrie is celebrating Mother's Day by honoring the generations of moms in her family.
Associated Press
Fires used as weapon in Sudan conflict destroyed more towns in west than ever in April, study says
Fires being used as a weapon in Sudan destroyed more villages and towns in the country's west in April than in any other month since the conflict began more than a year ago, an analysis by a U.K.-based rights group said Monday. Sudan Witness, an open-source project run by the nonprofit Center for Information Resilience, said 72 villages and settlements were either destroyed or damaged by fires last month, bringing the total number of settlements hit by fire in Sudan to 201 since the conflict began in mid-April of last year. “We’ve documented the patterns of numerous fires and the continuing devastation to settlements around western Sudan, large and small, since the conflict broke out last April," Anouk Theunissen, Sudan Witness project director, said in a news release Monday.