Stock Analysis

The Ensign Group, Inc.'s (NASDAQ:ENSG) Stock Been Rising: Are Strong Financials Guiding The Market?

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NasdaqGS:ENSG
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Ensign Group's (NASDAQ:ENSG) stock up by 6.9% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Ensign Group's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Ensign Group

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Ensign Group is:

18% = US$205m ÷ US$1.1b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.18 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. 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.

Ensign Group's Earnings Growth And 18% ROE

At first glance, Ensign Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 16%. This certainly adds some context to Ensign Group's exceptional 34% net income growth seen over the past five years. 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.

We then compared Ensign Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same period.

past-earnings-growth
NasdaqGS:ENSG Past Earnings Growth September 30th 2022

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for ENSG? You can find out in our latest intrinsic value infographic research report.

Is Ensign Group Making Efficient Use Of Its Profits?

Ensign Group has a really low three-year median payout ratio of 6.3%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Ensign Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Ensign Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Ensign Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Ensign Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:ENSG

Ensign Group

The Ensign Group, Inc. provides health care services in the post-acute care continuum and other ancillary businesses.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth2
Past Performance3
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet with acceptable track record.