Apollo Hospitals Enterprise Limited's (NSE:APOLLOHOSP) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Apollo Hospitals Enterprise's (NSE:APOLLOHOSP) recent performance, when its stock has declined 5.7% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Apollo Hospitals Enterprise's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Apollo Hospitals Enterprise

How Is ROE Calculated?

ROE 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 Apollo Hospitals Enterprise is:

15% = ₹12b ÷ ₹79b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Apollo Hospitals Enterprise's Earnings Growth And 15% ROE

At first glance, Apollo Hospitals Enterprise seems to have a decent ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Probably as a result of this, Apollo Hospitals Enterprise was able to see an impressive net income growth of 23% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Apollo Hospitals Enterprise's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 23% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Apollo Hospitals Enterprise's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Apollo Hospitals Enterprise Using Its Retained Earnings Effectively?

Apollo Hospitals Enterprise has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Apollo Hospitals Enterprise is reinvesting its earnings efficiently.

Moreover, Apollo Hospitals Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 17% over the next three years. As a result, the expected drop in Apollo Hospitals Enterprise's payout ratio explains the anticipated rise in the company's future ROE to 22%, over the same period.

Summary

On the whole, we feel that Apollo Hospitals Enterprise's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.