Ensign Group's (NASDAQ:ENSG) stock is up by a considerable 31% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Ensign Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Ensign Group is:
18% = US$132m ÷ US$718m (Based on the trailing twelve months to June 2020).
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 $0.18.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Ensign Group's Earnings Growth And 18% ROE
To begin with, Ensign Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Ensign Group's moderate 17% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Ensign Group's growth is quite high when compared to the industry average growth of 8.7% in the same period, which is great to see.
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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ensign Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ensign Group Making Efficient Use Of Its Profits?
Ensign Group has a low three-year median payout ratio of 16%, meaning that the company retains the remaining 84% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Ensign Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
In total, we are pretty happy with Ensign Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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