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Does finance have a role to play?
HC Surgical Specialists (Catalist:1B1) has had a great run on the stock market, with its shares rising a significant 7.7% in the last month. We wonder if and what role the company’s financials play in this price change, since a company’s long-term fundamentals typically dictate market outcomes. In this article, we decided to focus on HC’ Surgical Specialists 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 index that measures the rate of return on capital provided by the company’s shareholders.
See our latest analysis for HC Surgical Specialists
How to calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, the ROE for HC Surgical Specialists is:
27% = S$4.3m ÷ S$16m (Based on trailing twelve months to November 2023).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think about it is that for every SGD1 of equity, the company was able to make SGD0.27 of profit.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we can then assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
HC Surgical Specialists earnings growth and ROE of 27%
For starters, HC Surgical Specialists has a fairly high ROE, which is interesting. Secondly, a comparison to the industry’s reported average ROE of 9.6% is also not lost on us. Needless to say, we’re quite surprised to see that HC Surgical Specialists’ net profit has declined at a rate of 8.7% over the past five years. We think there may be other factors at play here that are holding back the company’s growth. These include low profit retention or poor capital allocation.
So, as a next step, we compared HC Surgical Specialists’ performance to the industry and were disappointed to find that while the company has shrunk its profits, the industry has been growing its profits at a rate of 15% in recent years. .
past profit growth
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already factored into the stock price. This helps them determine whether the stock is poised for a bright or bleak future. A 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 might want check if HC Surgical Specialists is trading on a high or low P/Ein relation to your sector.
The story continues
Is HC Surgical Specialists reinvesting its profits efficiently?
HC Surgical Specialists has a high three-year average payout ratio of 72% (i.e. it is retaining 28% of its profits). This suggests that the company is paying out most of its profits as dividends to its shareholders. This goes some way to explaining why their profits have been declining. The company is only left with a small capital to reinvest – a vicious cycle that does not benefit the company in the long term. To learn about the 5 risks we identified for HC Surgical Specialists, visit our risk panel for free.
Furthermore, HC Surgical Specialists has been paying dividends over a seven-year period, suggesting that management prefers to maintain dividend payments even though profits have declined.
Conclusion
Overall, we feel that HC Surgical Specialists certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth, even despite a high ROE. Remember that the company reinvests a small portion of its profits, which means investors are not reaping the benefits of the high rate of return. So far we have only made a brief study of the company’s growth data. So it might be worth checking this out. free detailed chart of HC Surgical Specialists’ past earnings, revenue and cash flows to gain deeper insight into company performance.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.