Instituto de Diagnóstico S.A. (SNSE:INDISA) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Instituto de Diagnóstico (SNSE:INDISA) has had a great run on the share market with its stock up by a significant 11% over the last month. 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. Particularly, we will be paying attention to Instituto de Diagnóstico's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Instituto de Diagnóstico

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 Instituto de Diagnóstico is:

0.6% = CL$651m ÷ CL$102b (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. That means that for every CLP1 worth of shareholders' equity, the company generated CLP0.01 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. 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.

A Side By Side comparison of Instituto de Diagnóstico's Earnings Growth And 0.6% ROE

It is quite clear that Instituto de Diagnóstico's ROE is rather low. Even compared to the average industry ROE of 8.0%, the company's ROE is quite dismal. Therefore, Instituto de Diagnóstico's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Instituto de Diagnóstico's net income growth with the industry and found that the average industry growth rate was 11% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Instituto de Diagnóstico is trading on a high P/E or a low P/E, relative to its industry.

Is Instituto de Diagnóstico Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 50% (meaning the company retains50% of profits) in the last three-year period, Instituto de Diagnóstico's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Instituto de Diagnóstico has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Instituto de Diagnóstico. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Instituto de Diagnóstico's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.