Is the market rewarding Advanced Medical Solutions Group plc (LON: AMS) with a negative sentiment as a result of its mixed fundamentals?
Advanced Medical Solutions Group (LON:AMS) had a tough week as its share price fell 8.1%. However, we decided to study the company’s financial statements to determine if it had anything to do with the price drop. Long-term fundamentals are usually what drive market results, so it’s worth paying close attention to them. In this article, we decided to focus on the return on equity of the Advanced Medical Solutions group.
Return on equity or return on equity is an important factor that should be taken into account by shareholders as it tells them how effective it is to reinvest their capital. In other words, it is the profitability ratio that measures the rate of return on capital provided by the shareholders of the company.
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How is return on equity calculated?
The ROE . formula he 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:
8.2% = £17 million in the UK £213 million (based on the subsequent twelve months to December 2021).
“Return” refers to the company’s earnings over the past year. This means that for every £1 of shareholder equity, the company generated a profit of £0.08.
Why is return on equity important to earnings growth?
We have already established that ROE serves as an effective profit generation measure for a company’s future earnings. Depending on how much of these earnings the company reinvests or “keeps”, and how effective this is, we can then assess the company’s earnings growth potential. In general, other things being equal, companies with high return on equity and retained earnings have a higher growth rate than companies that do not share these attributes.
Advanced Medical Solutions Group earnings growth and 8.2% return on equity
At first glance, the return on equity for the Advanced Medical Solutions group doesn’t look very promising. However, since the firm’s ROE is similar to the industry’s average ROE of 9.4%, we might as well avoid this for some reasoning. But Advanced Medical Solutions has seen its five-year net income decline 7.4% over the past five years. Remember that the company’s ROE is a little low to begin with. This may cause earnings growth to diminish.
So, as a next step, we compared Advanced Medical Solutions Group’s performance against the industry and were disappointed to discover that while the company was shrinking its profits, the industry increased its profits by an average of 1.0% in the same period.
Earnings growth is a big factor in stock valuation. The investor should try to determine whether the expected growth or decline in earnings, whichever the case may be, has been priced in. This then helps them determine whether the stock is positioned for a bright or bleak future. What is the value of AMS today? The intrinsic value infographic in our free research report helps visualize whether the market has currently mispriced AMS.
Is AMS effectively using its retained earnings?
When we combine the Advanced Medical Solutions Group’s low three-year average returns of 24% (it holds 76% of its profits), calculated for the past three years, we’re baffled by the lack of growth. A low return should mean that the company is keeping most of its profits and, therefore, should see some growth. So there may be other factors at play here that are likely to hamper growth. For example, the company faced some headwinds.
Additionally, Advanced Medical Solutions Group has been paying dividends over a period of at least ten years which indicates that keeping pace with dividend payments is a more important way of managing even if it comes at the expense of business growth. When examining the latest analyst consensus data, we found that the company is expected to continue paying approximately 21% of its dividends over the next three years. However, Advanced Medical Solutions Group’s ROE is expected to rise to 11% even though there is no expected change in the payout ratio.
Altogether, we are a little hesitant about the performance of the Advanced Medical Solutions suite. While a company has a high dividend retention rate, a low rate of return is likely to hamper the growth of its dividend. That being the case, the latest industry analyst forecasts show that analysts expect to see a significant improvement in the company’s earnings growth rate. Are these analysts’ forecasts based on broad industry expectations or company fundamentals? Click here to go to our analyst forecast page for the company.
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This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations 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, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.