The Austco Healthcare (ASX:AHC) share price has increased by a significant 15% over the past three months. Since the market typically pays for a company's long-term fundamentals, we decided to investigate whether a company's key performance indicators are influencing the market. Specifically, we decided to examine Austco Healthcare's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, it is a rate of return that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for Austco Healthcare.
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Austco Healthcare's ROE is:
16% = AU$7.1 million ÷ AU$44 million (based on the trailing twelve months to June 2024).
“Return” refers to a company's earnings over the past year. Another way to think of it is that for every A$1 worth of shares it owned, the company earned A$0.16 in profit.
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don't have the same characteristics.
At first glance, Austco Healthcare appears to have a decent ROE. Additionally, the company's ROE is quite impressive compared to the industry average of 7.3%. This likely laid the foundation for the modest 16% growth in Austco Healthcare's net income over the past five years.
We then compare it to the industry's net income growth rate, which is great to see that Austco Healthcare's growth rate is quite high when compared to the industry average growth rate of 8.3% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. One good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check whether Austco Healthcare is trading on a higher or lower P/E ratio, relative to its industry.
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