Are Robust Financials Driving The Recent Rally In Amedisys, Inc.'s (NASDAQ:AMED) Stock?

By
Simply Wall St
Published
January 13, 2021

Most readers would already be aware that Amedisys' (NASDAQ:AMED) stock increased significantly by 18% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Amedisys' ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Amedisys

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Amedisys is:

22% = US$168m ÷ US$758m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Amedisys' Earnings Growth And 22% ROE

First thing first, we like that Amedisys has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. So, the substantial 41% net income growth seen by Amedisys over the past five years isn't overly surprising.

As a next step, we compared Amedisys' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.0%.

NasdaqGS:AMED Past Earnings Growth January 13th 2021

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Amedisys''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Amedisys Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that Amedisys' 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 growth is expected to slow down. 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. 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.
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