Is Austco Healthcare Limited’s (ASX:AHC) Latest Stock Performance A Reflection Of Its Financial Health?

Austco Healthcare’s (ASX:AHC) stock is up by a considerable 15% over the past 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. Specifically, we decided to study Austco Healthcare’s ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Austco Healthcare

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 Austco Healthcare is:

16% = AU$7.1m ÷ AU$44m (Based on the trailing twelve months to June 2024).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.16 in profit.

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 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.

At first glance, Austco Healthcare seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 7.3%. This probably laid the ground for Austco Healthcare’s moderate 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Austco Healthcare’s growth is quite high when compared to the industry average growth of 8.3% in the same period, which is great 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. 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 Austco Healthcare is trading on a high P/E or a low P/E, relative to its industry.

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