Most readers would already know that Encompass Health ( NYSE:EHC ) stock has increased by a significant 12% over the past three months. As most people know, fundamentals typically guide market price movements over the long term, so today we’ll take a look at the company’s key financial metrics to see if they play any role in the recent price movement. I decided to judge. In particular, I would like to pay attention to Encompass Health’s ROE today.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. More simply, it measures a company’s profitability in relation to shareholder equity.
Check out our latest analysis for Encompass Health.
How do I calculate return on equity?
The formula for calculating ROE is as follows:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Encompass Health’s ROE is:
21% = USD 530 million ÷ USD 2.5 billion (based on the trailing twelve months to June 2024).
“Return” is the annual profit. This means that for every $1 of shareholder investment, the company generates $0.21 in profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE is a measure of a company’s profitability. We are then able to assess a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
Covering Health’s revenue growth and ROE of 21%
At first glance, Encompass Health appears to have a decent ROE. The company’s ROE looks quite impressive when compared to the industry average ROE of 13%. Despite this, Encompass Health’s five-year net income growth was very low, averaging just 3.3%. This is a bit unexpected for a company with such high profit margins. Reasons why this can happen include, for example, a company’s high dividend payout ratio or a business’s poor capital allocation.
Next, when we compare it to the industry’s net income growth rate, we find that the growth rate reported by Encompass Health is lower than the industry’s growth rate of 6.2% over the past few years. This is what we don’t want to see.
Past revenue growth
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you’ll know if the stock is headed for clear blue waters or if a swamp awaits. If you’re wondering about Encompass Health’s valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
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Is Encompass Health effectively utilizing its retained earnings?
Despite having a typical three-year median dividend payout ratio of 33% (with a retention rate of 67% over the past three years), Encompass Health has had very little earnings growth, as we saw above. So there may be other reasons. For example, explain that your business may be declining.
Additionally, Encompass Health has been paying dividends for at least 10 years, suggesting that continuing to pay dividends is far more important to management, even at the expense of business growth. . After examining the latest analyst consensus data, we find that the company’s future dividend payout ratio is expected to decline to 14% over the next three years. Although the expected dividend payout ratio will decline, ROE is not expected to change significantly.
conclusion
Overall, we feel that Encompass Health has some positive attributes. However, given the high ROE and high profit retention rate, we would expect the company to deliver high earnings growth, but that is not the case here. This suggests that there may be some external threat to the business that is hindering its growth. That said, the company’s earnings are expected to accelerate, according to the latest industry analyst forecasts. To know more about the company’s future revenue growth forecasts, take a look at this free report on 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.
