Austco Healthcare (ASX:AHC) has had a tough three months, with the share price down 7.5%. However, stock prices are usually driven by a company's financial health in the long run, and in this case it looks pretty respectable. Specifically, we decided to examine Austco Healthcare's ROE in this article.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. In other words, ROE shows the profit generated per dollar of a shareholder's investment.
Check out our latest analysis for Ausco Healthcare.
How do you calculate return on equity?
of Calculation formula for return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Austco Healthcare's ROE is:
7.7% = AU$2.1 million ÷ AU$26 million (based on the trailing twelve months to December 2023).
“Return” is the profit over the past 12 months. One way he conceptualizes this is that for every A$1 of shareholders' equity, the company earned him A$0.08 of profit.
What is the relationship between ROE and profit growth rate?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. 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.
Austco Healthcare's revenue growth and ROE of 7.7%
At first glance, Austco Healthcare's ROE doesn't seem to be all that exciting. However, upon closer inspection, we find that his ROE for the company is comparable to his industry average of 7.7%. That said, Austco Healthcare has shown modest net income growth of 14% over the past five years. Considering the moderately low ROE, it's quite possible that other aspects are positively impacting the company's earnings growth. Maintaining high profits and efficient management, etc.
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 5.6% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know 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 see whether Austco Healthcare is trading on a higher or lower P/E ratio compared to its industry.
Is Austco Healthcare using its profits efficiently?
The company has paid some dividends in the past, but currently does not. It is assumed that the company reinvests all of its profits to grow its business.
summary
Overall, we feel Austco Healthcare has some positive attributes. Despite low profit margins, the company recorded impressive revenue growth as a result of significant reinvestment in the business. We don't want to completely fire the company, but we do try to see how risky the business is in order to make more informed decisions about the company. Our risks dashboard shows the three risks he has identified for Austco Healthcare.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
