Fisher & Paykel Healthcare (NZSE:FPH) has had a great run on the share market with its stock up by a significant 11% over the last month. 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. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How To Calculate Return On Equity?
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:
32% = NZ$392m ÷ NZ$1.2b (Based on the trailing twelve months to September 2020).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every NZ$1 of its shareholder’s investments, the company generates a profit of NZ$0.32.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 Fisher & Paykel Healthcare’s Earnings Growth And 32% ROE
To begin with, Fisher & Paykel Healthcare has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 14% also doesn’t go unnoticed by us. This probably laid the groundwork for Fisher & Paykel Healthcare’s moderate 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Fisher & Paykel Healthcare’s growth is quite high when compared to the industry average growth of 15% 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 FPH worth today? The intrinsic value infographic in our free research report helps visualize whether FPH is currently mispriced by the market.
Is Fisher & Paykel Healthcare Efficiently Re-investing Its Profits?
Fisher & Paykel Healthcare has a significant three-year median payout ratio of 63%, meaning that it is left with only 37% 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, Fisher & Paykel Healthcare 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. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 63% of its profits over the next three years. Accordingly, forecasts suggest that Fisher & Paykel Healthcare’s future ROE will be 32% which is again, similar to the current ROE.
Overall, we are quite pleased with Fisher & Paykel Healthcare’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. 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. 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.
This article by Simply Wall St is general in nature. 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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