HealthStream, Inc.'s (NASDAQ:HSTM) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
HealthStream (NASDAQ:HSTM) has had a great run on the share market with its stock up by a significant 21% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on HealthStream's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for HealthStream
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for HealthStream is:
2.0% = US$6.4m ÷ US$323m (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.02 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
HealthStream's Earnings Growth And 2.0% ROE
It is hard to argue that HealthStream's ROE is much good in and of itself. Even when compared to the industry average of 9.7%, the ROE figure is pretty disappointing. Thus, the low net income growth of 3.6% seen by HealthStream over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that HealthStream's reported growth was lower than the industry growth of 11% in the same period, which is not something we like to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about HealthStream's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is HealthStream Using Its Retained Earnings Effectively?
HealthStream doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, there's only been very little earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Summary
On the whole, we feel that the performance shown by HealthStream can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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