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Netcare’s (JSE:NTC) stock up by 5.8% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Specifically, we decided to study Netcare’s ROE in this article.
Return on equity or ROE is vital for a shareholder because it tells them how successfully their capital is being reinvested. In short, ROE shows the benefit each dollar generates relative to your shareholders’ investments.
View our latest analysis for Netcare
The ROE can be calculated using the formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Stockholders’ Equity
So, based on the formula above, Netcare’s ROE is:
12% = R1. 3b ÷ R11b (based on the twelve months to September 2023).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each ZAR1 of shareholders’ capital it has, the company made ZAR0.12 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “holds” and how well it does so, we must assess the potential for expansion of a company’s earnings. Assuming everything else remains unchanged: the higher the ROE and profit retention, the higher a company’s rate of expansion will be compared to corporations that don’t necessarily have those characteristics.
At first glance, Netcare’s ROE doesn’t have much to say. However, since the company’s ROE is an industry average of 14%, we can think about it. But again, Netcare’s five-year net profit declined by 17%. Keep in mind that the company’s ROE is a bit low to begin with. This partly explains the drop in revenues.
So, in the next step, we compared Netcare’s functionality to that of the industry and were disappointed to note that although the company has reduced its profits, the sector has increased its profits at a rate of 0. 4% in recent years. .
The basis on which to price a company is largely similar to its earnings growth. What investors want to know then is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will be able to get an idea if the actions are heading towards transparent blue waters or if swampy waters await them. Is NTC well priced? This intrinsic pricing infographic has everything you want to know.
Netcare’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 69% (or a retention ratio of 31%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Netcare by visiting our risks dashboard for free on our platform here.
Furthermore, Netcare has been paying dividends for at least ten years, suggesting that maintaining dividend bills is much more vital to management, even if it comes at the expense of company growth. According to the latest analyst estimates, we have found that the company’s long-term payout ratio over the next 3 years is expected to remain at 62%. However, Netcare’s ROE is expected to reach 19%, no replacement is expected in its payout ratio.
Overall, Netcare’s functionality is underwhelming. Due to its low ROE and lack of reinvestment in the business, the company has noticed a disappointing earnings growth rate. That said, analyzing existing analyst estimates, we found that the company’s earnings expansion rate is expected to see a massive improvement. Are those analysts’ expectations based on general industry expectations or corporate fundamentals?Click here to proceed to our analysts’ forecasts page for the company.
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