Yahoo Finance Advanced Medical Solutions Group plc's (LON:AMS) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Advanced Medical Solutions Group (LON:AMS) has had a great run on the share market with its stock up by a significant 13% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Advanced Medical Solutions Group's ROE today.
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.
Check out our latest analysis for Advanced Medical Solutions Group
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Advanced Medical Solutions Group is:
6.5% = UK£16m ÷ UK£244m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.07.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Advanced Medical Solutions Group's Earnings Growth And 6.5% ROE
On the face of it, Advanced Medical Solutions Group's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.1%. However, Advanced Medical Solutions Group has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.
As a next step, we compared Advanced Medical Solutions Group's performance with the industry and discovered the industry has shrunk at a rate of 5.9% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does offer shareholders some relief
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for AMS? You can find out in our latest intrinsic value infographic research report.
Is Advanced Medical Solutions Group Making Efficient Use Of Its Profits?
Advanced Medical Solutions Group has a low three-year median payout ratio of 24% (or a retention ratio of 76%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.
Additionally, Advanced Medical Solutions Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 21%. However, Advanced Medical Solutions Group's ROE is predicted to rise to 10% despite there being no anticipated change in its payout ratio.
Summary
In total, we're a bit ambivalent about Advanced Medical Solutions Group's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
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