Looking at IHH Healthcare Berhad’s (KLSE:IHH) mostly flat share price movement over the past three months, it is easy to think that there’s nothing interesting about the stock. However, its worth giving the company a closer given that its key financial performance indicators aren’t particularly bad and long-term financial health is usually what drive market prices. Particularly, we will be paying attention to IHH Healthcare Berhad’s ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for IHH Healthcare Berhad
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for IHH Healthcare Berhad is:
7.3% = RM2.2b ÷ RM29b (Based on the trailing twelve months to September 2022).
The ‘return’ is the profit over the last twelve months. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.07 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
IHH Healthcare Berhad’s Earnings Growth And 7.3% ROE
When you first look at it, IHH Healthcare Berhad’s ROE doesn’t look that attractive. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 18%. In spite of this, IHH Healthcare Berhad was able to grow its net income considerably, at a rate of 31% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then performed a comparison between IHH Healthcare Berhad’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 31% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is IHH fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is IHH Healthcare Berhad Using Its Retained Earnings Effectively?
IHH Healthcare Berhad’s three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like IHH Healthcare Berhad is reinvesting its earnings efficiently.
Additionally, IHH Healthcare Berhad has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 34% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.
Conclusion
On the whole, we do feel that IHH Healthcare Berhad has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the latest analysts predictions 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 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.
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