The Capitol Health (ASX:CAJ) share price has increased by 8.7% over the past three months. However, since long-term fundamentals ultimately determine market outcomes, we decided to focus on its weak financial position in this article. Specifically, we decided to examine Capitol Health's ROE in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for Capitol Health.
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Capitol Health's ROE is:
4.7% = AU$6.3 million ÷ AU$133 million (based on the trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. Another way to think of it is that for every A$1 worth of shares, the company was able to earn his A$0.05 profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
Capitol Health's revenue growth and ROE 4.7%
At first glance, Capitol Health's ROE does not seem very promising. However, a closer look reveals that his ROE for the company is close to the industry average of his 4.7%. However, Capitol Health's net income has declined 38% over the past five years. Don't forget that the company's ROE is a bit low to begin with. Therefore, this can explain the contraction in earnings to some extent.
That said, when we compared Capitol Health's performance to its industry, we found that while the company's revenues have been shrinking, the industry has grown its revenues at a rate of 1.5% over the same five-year period, which is concerning. I held
Earnings growth is a big factor in stock valuation. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). Doing so will help you determine whether a stock's future is promising or ominous. Is the market factoring in CAJ's future prospects? Find out in our latest Intrinsic Value infographic research report.
Is Capitol Health using its profits efficiently?
With a high three-year median payout ratio of 80% (meaning 20% of profits are retained), most of Capitol Health's profits are paid out to shareholders, which explains the company's shrinking earnings. It has become. There is little money left to reinvest in the business, so earnings are unlikely to increase. The risks dashboard should now show the three risks he has identified for Capitol Health.
Additionally, Capitol Health has been paying dividends for at least 10 years, suggesting that continuing to pay dividends is far more important to management, even at the expense of business growth. Masu. According to existing analyst forecasts, the company's future dividend payout ratio is expected to drop to 57% in the next three years. As a result, the expected decline in Capitol Health's dividend payout ratio explains that the company's future ROE is expected to rise to 11% over the same period.
conclusion
Overall, we should think twice before deciding on any investment action regarding Capitol Health. The company's profit growth rate was disappointing, as ROE was low and there was not much reinvestment in the business. If so, based on the latest industry analyst forecasts, analysts expect the company's profit growth rate to improve significantly. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
