Viemed Healthcare, Inc.'s (TSE:VMD) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
March 02, 2021
TSX:VMD
Source: Shutterstock

Viemed Healthcare's (TSE:VMD) stock is up by a considerable 14% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Viemed Healthcare's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Viemed Healthcare

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Viemed Healthcare is:

38% = US$29m ÷ US$75m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.38 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Viemed Healthcare's Earnings Growth And 38% ROE

First thing first, we like that Viemed Healthcare has an impressive ROE. Even when compared to the industry average of 35% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 30% net income growth seen by Viemed Healthcare was probably achieved as a result of the high ROE.

We then compared Viemed Healthcare's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

past-earnings-growth
TSX:VMD Past Earnings Growth March 3rd 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Viemed Healthcare's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Viemed Healthcare Efficiently Re-investing Its Profits?

Conclusion

In total, we are pretty happy with Viemed Healthcare's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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