Hospital Mater Dei S.A. (BVMF:MATD3) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Hospital Mater Dei (BVMF:MATD3) has had a great run on the share market with its stock up by a significant 11% over the last week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Hospital Mater Dei'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.

Check out our latest analysis for Hospital Mater Dei

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 Hospital Mater Dei is:

7.2% = R$123m ÷ R$1.7b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.07 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Hospital Mater Dei's Earnings Growth And 7.2% ROE

As you can see, Hospital Mater Dei's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 7.5%. The flat earnings by Hospital Mater Dei over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Hospital Mater Dei'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 3.3% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for MATD3? You can find out in our latest intrinsic value infographic research report.

Is Hospital Mater Dei Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 28% (implying that the company keeps 72% of its income) over the last three years, Hospital Mater Dei has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Hospital Mater Dei started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 30% of its profits over the next three years. Regardless, the future ROE for Hospital Mater Dei is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that the performance shown by Hospital Mater Dei 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.