Do Its Financials Have Any Role To Play In Driving Metropolis Healthcare Limited's (NSE:METROPOLIS) Stock Up Recently?

Most readers would already be aware that Metropolis Healthcare's (NSE:METROPOLIS) stock increased significantly by 18% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Metropolis Healthcare's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Metropolis Healthcare

How To 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 Metropolis Healthcare is:

13% = ₹1.3b ÷ ₹10b (Based on the trailing twelve months to September 2023).

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 ₹0.13 in profit.

What Is The Relationship Between ROE And 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. 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 Metropolis Healthcare's Earnings Growth And 13% ROE

On the face of it, Metropolis Healthcare's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 13%. Even so, Metropolis Healthcare has shown a fairly decent growth in its net income which grew at a rate of 5.6%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Metropolis Healthcare's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 34% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Metropolis Healthcare is trading on a high P/E or a low P/E, relative to its industry.

Is Metropolis Healthcare Making Efficient Use Of Its Profits?

In Metropolis Healthcare's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 25% (or a retention ratio of 75%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Metropolis Healthcare has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. However, Metropolis Healthcare's ROE is predicted to rise to 21% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Metropolis Healthcare certainly does have some positive factors to consider. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.