Does the market reward Hospital Mater Dei SA (BVMF: MATD3) with negative sentiment due to its mixed fundamentals?
Hospital Mater Dei (BVMF: MATD3) had three difficult months with its share price down 33%. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Stock prices are generally determined by a company’s financial performance over the long term, which is why we have decided to pay more attention to the financial performance of the company. In particular, we will pay particular attention to the ROE of the Hospital Mater Dei today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Hospital Mater Dei
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Hospital Mater Dei is:
8.8% = 130 million reais ÷ 1.5 billion reais (based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This means that for every R $ 1 worth of equity, the company generated R $ 0.09 in profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Mater Dei Hospital profit growth and 8.8% ROE
As you can see, Hospital Mater Dei’s ROE appears to be quite low. Additionally, we noted that the company’s ROE is similar to the industry average of 11%. Hospital Mater Dei’s stable revenue over the past five years could likely be the result of lower ROE.
Then, comparing with the industry net income growth, we found that the reported growth of Mater Dei Hospital was lower than the industry growth of 2.0% during the same period, this which is not something we like to see.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading towards clear blue waters or if swampy waters are ahead of them. A 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 outlook. So, you might want to check if Hospital Mater Dei is trading high P / E or low P / E, relative to its industry.
Is Hospital Mater Dei Using Its Retained Earnings Effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. We deduce that the company has reinvested all its profits to develop its activity.
Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 31%. Still, forecasts suggest that Hospital Mater Dei’s future ROE will increase to 16%, although the company’s payout ratio isn’t expected to change much.
All in all, we are a little ambivalent about the performance of the Hospital Mater Dei. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free business analyst forecast report to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.