Apollo Hospitals Enterprise Limited's (NSE:APOLLOHOSP) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Apollo Hospitals Enterprise (NSE:APOLLOHOSP) has had a great run on the share market with its stock up by a significant 9.4% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Apollo Hospitals Enterprise's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Apollo Hospitals Enterprise

How Do You 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 Apollo Hospitals Enterprise is:

12% = ₹4.3b ÷ ₹35b (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.12.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Apollo Hospitals Enterprise's Earnings Growth And 12% ROE

On the face of it, Apollo Hospitals Enterprise's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 15%, we may spare it some thought. We can see that Apollo Hospitals Enterprise has grown at a five year net income growth average rate of 4.6%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

As a next step, we compared Apollo Hospitals Enterprise's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 18% 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 Apollo Hospitals Enterprise fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Apollo Hospitals Enterprise Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 37% (or a retention ratio of 63% over the past three years, Apollo Hospitals Enterprise has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Apollo Hospitals Enterprise has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 14% over the next three years. The fact that the company's ROE is expected to rise to 20% over the same period is explained by the drop in the payout ratio.

Conclusion

On the whole, we feel that the performance shown by Apollo Hospitals Enterprise can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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