Amazon.com's (NASDAQ:AMZN) stock is up by 2.5% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Amazon.com's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Amazon.com

How Is ROE Calculated?

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 Amazon.com is:

19% = US$44b ÷ US$236b (Based on the trailing twelve months to June 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 $0.19.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Amazon.com's Earnings Growth And 19% ROE

To begin with, Amazon.com seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 21%. Consequently, this likely laid the ground for the decent growth of 14% seen over the past five years by Amazon.com.

We then performed a comparison between Amazon.com's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is AMZN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Amazon.com Using Its Retained Earnings Effectively?

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