Are Robust Financials Driving The Recent Rally In Allscripts Healthcare Solutions, Inc.'s (NASDAQ:MDRX) Stock?

By
Simply Wall St
Published
March 25, 2022
NasdaqGS:MDRX
Source: Shutterstock

Most readers would already be aware that Allscripts Healthcare Solutions' (NASDAQ:MDRX) stock increased significantly by 19% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Allscripts Healthcare Solutions' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Allscripts Healthcare Solutions

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 Allscripts Healthcare Solutions is:

9.5% = US$134m ÷ US$1.4b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Allscripts Healthcare Solutions' Earnings Growth And 9.5% ROE

On the face of it, Allscripts Healthcare Solutions' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.8%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 5.8% seen over the past five years by Allscripts Healthcare Solutions. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Allscripts Healthcare Solutions' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 5.8% in the same period.

past-earnings-growth
NasdaqGS:MDRX Past Earnings Growth March 25th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Allscripts Healthcare Solutions''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Allscripts Healthcare Solutions Making Efficient Use Of Its Profits?

Allscripts Healthcare Solutions doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

On the whole, we feel that Allscripts Healthcare Solutions' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Allscripts Healthcare Solutions.

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