Apollo Medical Holdings, Inc.'s (NASDAQ:AMEH) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
December 23, 2021
NasdaqCM:AMEH
Source: Shutterstock

With its stock down 32% over the past month, it is easy to disregard Apollo Medical Holdings (NASDAQ:AMEH). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Apollo Medical Holdings' ROE.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Apollo Medical Holdings

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 Medical Holdings is:

15% = US$82m ÷ US$532m (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.15 in profit.

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. 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.

Apollo Medical Holdings' Earnings Growth And 15% ROE

To begin with, Apollo Medical Holdings seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. Consequently, this likely laid the ground for the impressive net income growth of 33% seen over the past five years by Apollo Medical Holdings. However, there could also be other drivers behind this 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.

As a next step, we compared Apollo Medical Holdings' 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 16%.

past-earnings-growth
NasdaqCM:AMEH Past Earnings Growth December 23rd 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. 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 Apollo Medical Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Apollo Medical Holdings Making Efficient Use Of Its Profits?

Apollo Medical Holdings doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we are quite pleased with Apollo Medical Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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