Medical Facilities Corporation's (TSE:DR) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Medical Facilities (TSE:DR) has had a great run on the share market with its stock up by a significant 26% over the last three months. 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 Medical Facilities' ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Medical Facilities
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 Medical Facilities is:
21% = US$38m ÷ US$177m (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.21 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Medical Facilities' Earnings Growth And 21% ROE
At first glance, Medical Facilities seems to have a decent ROE. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. This probably laid the ground for Medical Facilities' moderate 12% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Medical Facilities' reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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 Medical Facilities is trading on a high P/E or a low P/E, relative to its industry.
Is Medical Facilities Efficiently Re-investing Its Profits?
Medical Facilities has a significant three-year median payout ratio of 82%, meaning that it is left with only 18% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Moreover, Medical Facilities is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Summary
Overall, we feel that Medical Facilities certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
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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