Aster DM Healthcare Limited (NSE:ASTERDM) Stock's On A Decline: Are Poor Fundamentals The Cause?

It is hard to get excited after looking at Aster DM Healthcare's (NSE:ASTERDM) recent performance, when its stock has declined 11% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Aster DM Healthcare's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

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 Aster DM Healthcare is:

8.1% = ₹2.9b ÷ ₹36b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.08 in profit.

See our latest analysis for Aster DM Healthcare

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. 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. 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.

A Side By Side comparison of Aster DM Healthcare's Earnings Growth And 8.1% ROE

As you can see, Aster DM Healthcare's ROE looks pretty weak. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. As a result, Aster DM Healthcare's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 23% over the last few years.

Earnings growth is a huge factor in stock valuation. 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 Aster DM Healthcare's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aster DM Healthcare Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 81% (meaning, the company retains only 19% of profits) for Aster DM Healthcare suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Aster DM Healthcare only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Aster DM Healthcare. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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.