Inspiration Healthcare Group (LON:IHC) has had a great run on the share market with its stock up by a significant 7.1% over the last month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Inspiration Healthcare Group’s ROE.
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.
See our latest analysis for Inspiration Healthcare Group
How To Calculate Return On Equity?
Return on equity 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 Inspiration Healthcare Group is:
6.9% = UK£733k ÷ UK£11m (Based on the trailing twelve months to January 2020).
The ‘return’ is the income the business earned over the last year. That means that for every £1 worth of shareholders’ equity, the company generated £0.07 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Inspiration Healthcare Group’s Earnings Growth And 6.9% ROE
On the face of it, Inspiration Healthcare Group’s ROE is not much to talk about. However, given that the company’s ROE is similar to the average industry ROE of 7.9%, we may spare it some thought. Moreover, we are quite pleased to see that Inspiration Healthcare Group’s net income grew significantly at a rate of 27% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Inspiration Healthcare Group’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 32% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. 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 Inspiration Healthcare Group is trading on a high P/E or a low P/E, relative to its industry.
Is Inspiration Healthcare Group Efficiently Re-investing Its Profits?
Given that Inspiration Healthcare Group doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
Overall, we feel that Inspiration Healthcare Group certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 4 risks we have identified for Inspiration Healthcare Group.
This article by Simply Wall St is general in nature. 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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