Is Fisher & Paykel Healthcare Corporation Limited's (NZSE:FPH) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Most readers would already be aware that Fisher & Paykel Healthcare's (NZSE:FPH) stock increased significantly by 11% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Fisher & Paykel Healthcare's ROE today.
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.
See our latest analysis for Fisher & Paykel Healthcare
How Is ROE Calculated?
Return on equity 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 Fisher & Paykel Healthcare is:
15% = NZ$262m ÷ NZ$1.8b (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.15 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Fisher & Paykel Healthcare's Earnings Growth And 15% ROE
To begin with, Fisher & Paykel Healthcare seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Despite this, Fisher & Paykel Healthcare's five year net income growth was quite low averaging at only 4.7%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
We then performed a comparison between Fisher & Paykel Healthcare's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.3% in the same 5-year 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. 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 prospects. So, you may want to check if Fisher & Paykel Healthcare is trading on a high P/E or a low P/E, relative to its industry.
Is Fisher & Paykel Healthcare Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Fisher & Paykel Healthcare's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, Fisher & Paykel Healthcare has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 66% of its profits over the next three years. Regardless, the future ROE for Fisher & Paykel Healthcare is predicted to rise to 22% despite there being not much change expected in its payout ratio.
Summary
Overall, we feel that Fisher & Paykel Healthcare certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
