With its share price down 8.7% over the past three months, it's easy to ignore Sonic Healthcare (ASX:SHL). However, stock prices are usually driven by a company's long-term financial performance, which in this case looks very promising. In particular, I would like to pay attention to Sonic Healthcare's ROE today.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. 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 Sonic Healthcare.
How do you calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Sonic Healthcare's ROE is:
6.8% = AU$534 million ÷ AU$7.9 billion (based on the trailing twelve months to December 2023).
“Return” is the profit over the past 12 months. That means for every AU$1 of shareholders' equity, the company generated AU$0.07 of his profit.
What is the relationship between ROE and profit growth rate?
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 all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don't have the same characteristics.
Sonic Healthcare's revenue growth and ROE 6.8%
At first glance, Sonic Healthcare's ROE doesn't look very attractive. However, the fact that the company's ROE is higher than the industry average ROE of 4.7% is certainly interesting. This probably goes some way to explaining Sonic Healthcare's modest growth of 10% over the past five years, among other factors. Note that the company's ROE is moderately low. It's just that the industry's ROE is low. Therefore, there may be other reasons for the increase in revenue. For example, the industry as a whole may be experiencing a period of high growth, or the company's dividend payout ratio may be low.
We then compared Sonic Healthcare's net income growth rate to its industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 1.5%.
Earnings growth is an important metric to consider when evaluating a stock. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. What is SHL worth today? The intrinsic value infographic in our free research report helps you visualize whether SHL is currently mispriced by the market.
Is Sonic Healthcare effectively utilizing its internal reserves?
Sonic Healthcare's median three-year payout ratio is 39%, which means it retains the remaining 61% of its profits. This suggests that the dividend is well covered, and given the company's healthy growth, it appears that management is reinvesting earnings efficiently.
Additionally, Sonic Healthcare has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders. After examining the latest analyst consensus data, we found that the company's future dividend payout ratio is expected to rise to 70% over the next three years. Still, according to forecasts, Sonic Healthcare's future ROE is expected to rise to 9.9%, even though the company's dividend payout ratio is expected to rise. It is conceivable that there may be other characteristics of the business that could drive the expected growth in his ROE of the company.
conclusion
Overall, we are very satisfied with Sonic Healthcare's performance. In particular, we like that the company reinvests heavily in its business at a reasonable rate of return. Unsurprisingly, this led to impressive profit growth. That said, the company's earnings are expected to accelerate, according to the latest industry analyst forecasts. If you want to know 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.
