Fisher & Paykel Healthcare Corporation Limited's (NZSE:FPH) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Most readers would already know that Fisher & Paykel Healthcare's (NZSE:FPH) stock increased by 3.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Fisher & Paykel Healthcare'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Fisher & Paykel Healthcare

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 Fisher & Paykel Healthcare is:

15% = NZ$262m ÷ NZ$1.8b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Fisher & Paykel Healthcare's Earnings Growth And 15% ROE

At first glance, Fisher & Paykel Healthcare seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. Yet, Fisher & Paykel Healthcare has posted measly growth of 4.7% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing Fisher & Paykel Healthcare's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.2% over the last few years.

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. Is Fisher & Paykel Healthcare fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fisher & Paykel Healthcare Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Fisher & Paykel Healthcare's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Fisher & Paykel Healthcare 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 67%. Regardless, the future ROE for Fisher & Paykel Healthcare is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Fisher & Paykel Healthcare certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.