Is Promisia Healthcare Limited's (NZSE:PHL) Stock's Recent Performance Being Led By Its Attractive Financial Prospects? – Simply Wall St

Promisia Healthcare (NZSE:PHL) has had a great run on the share market with its stock up by a significant 100% over the last week. 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 Promisia 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Promisia 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 Promisia Healthcare is:

12% = NZ$2.2m ÷ NZ$19m (Based on the trailing twelve months to March 2022).

The ‘return’ is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders’ equity, the company generated NZ$0.12 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. 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 Promisia Healthcare’s Earnings Growth And 12% ROE

To start with, Promisia Healthcare’s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. This certainly adds some context to Promisia Healthcare’s exceptional 37% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.

As a next step, we compared Promisia Healthcare’s 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 10%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Promisia Healthcare’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Promisia Healthcare Efficiently Re-investing Its Profits?

Promisia Healthcare 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

On the whole, we feel that Promisia Healthcare’s performance has been quite good. 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. 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. To know the 5 risks we have identified for Promisia Healthcare visit our risks dashboard for free.

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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.