Molina Healthcare, Inc.'s (NYSE:MOH) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Molina Healthcare (NYSE:MOH) has had a great run on the share market with its stock up by a significant 18% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Molina Healthcare's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Molina Healthcare
How Do You 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 Molina Healthcare is:
23% = US$590m ÷ US$2.5b (Based on the trailing twelve months to September 2021).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.23 in profit.
What Is The Relationship Between ROE And 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Molina Healthcare's Earnings Growth And 23% ROE
To begin with, Molina Healthcare has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 17% the company's ROE is quite impressive. So, the substantial 43% net income growth seen by Molina Healthcare over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Molina Healthcare's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MOH worth today? The intrinsic value infographic in our free research report helps visualize whether MOH is currently mispriced by the market.
Is Molina Healthcare Using Its Retained Earnings Effectively?
Given that Molina Healthcare doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
Overall, we are quite pleased with Molina Healthcare's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
