It’s hard to get excited about EZZ Life Sciences Holdings (ASX:EZZ)’s recent performance, with its share price down 19% in the past three months. However, a closer look at the company’s healthy financials might make you think again. The company is worth keeping an eye on, given that fundamentals usually drive long-term market outcomes. This time, we decided to focus on EZZ Life Science Holdings’ ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. More simply, it measures a company’s profitability in relation to shareholder equity.
Check out our latest analysis for EZZ Life Science Holdings.
How do you calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, EZZ Life Science Holdings’ ROE is:
25% = AUD 3.6 million ÷ AUD 15 million (based on the trailing twelve months to June 2023).
“Earnings” is the amount of your after-tax earnings over the past 12 months. One way he conceptualizes this is that for every A$1 of shareholders’ equity, the company earned him A$0.25 of profit.
What is the relationship between ROE and profit growth rate?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
EZZ Life Science Holdings’ Earnings Growth and ROE 25%
First of all, we like that EZZ Life Sciences Holdings has a good ROE. Secondly, we can’t ignore the comparison to the average ROE of 10% reported by the industry. Perhaps this laid the foundation for the modest 20% growth in net profit of his EZZ Life Sciences Holdings seen over the past five years.
As a next step, we compared EZZ Life Sciences Holdings’ net income growth with the industry, and were disappointed to find that the company’s growth rate was lower than the industry’s average growth rate of 27% over the same period.
The foundations that give a company value have a lot to do with its revenue growth. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. One 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 whether EZZ Life Sciences Holdings is trading on a higher or lower P/E ratio relative to its industry.
Does EZZ Life Sciences Holdings effectively reinvest its profits?
EZZ Life Sciences Holdings’ three-year median payout ratio is a low 11%, meaning the company retains the remaining 89% of its profits. This suggests that management is reinvesting most of its profits into growing the business.
EZZ Life Sciences Holdings has been growing its earnings, but it only recently started paying a dividend. This likely means that the company has decided to impress new and existing shareholders with its dividend. After researching the latest analyst consensus data, we found that the company’s future dividend payout ratio is expected to rise to 18% over the next three years. Therefore, the expected increase in the dividend payout ratio explains that the company’s ROE is expected to fall to his 13% over the same period.
summary
Overall, we’re very satisfied with EZZ Life Sciences Holdings’ performance. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. It’s no surprise that the result is a significant increase in revenue. If the company continues to grow its revenue as it has been, it could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember that the price of a stock also depends on its perceived risk. Therefore, investors should always be informed about the risks involved before investing in a company. To learn about the 1 risks we have identified for EZZ Life Sciences Holdings, please visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.