Clinic business

Are strong financials behind the recent rally in EuroEyes International Eye Clinic Limited (HKG:1846) shares?

EuroEyes International Eye Clinic (HKG:1846) stock is up 16% in the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of EuroEyes International Eye Clinic in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest review for EuroEyes International Eye Clinic

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for EuroEyes International Eye Clinic is:

13% = HK$132 million ÷ HK$1.0 billion (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. This means that for every HK$1 of equity, the company generated HK$0.13 of profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share 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 things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

EuroEyes International Eye Clinic Profit Growth and 13% ROE

For starters, the ROE from EuroEyes International Eye Clinic seems acceptable. Compared to the industry average ROE of 7.4%, the company’s ROE looks quite remarkable. This certainly adds some context to EuroEyes International Eye Clinic’s outstanding 30% net income growth over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with the growth in net income of the sector, we found that the growth of EuroEyes International Eye Clinic is quite high compared to the average growth of the sector of 8.5% during the same period, which is great to see.

SEHK: 1846 Past Earnings Growth June 27, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you might want to check whether EuroEyes International Eye Clinic is trading on a high P/E or a low P/E, relative to its sector.

Does EuroEyes International Eye Clinic use its retained earnings effectively?

EuroEyes International Eye Clinic’s three-year median payout ratio to shareholders is 11%, which is quite low. This implies that the company retains 89% of its profits. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.

While EuroEyes International Eye Clinic has increased its profits, it only recently started paying dividends, which likely means the company has decided to impress new and existing shareholders with a dividend. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 14% over the next three years. Either way, EuroEyes International Eye Clinic’s future ROE is expected to reach 20% despite the planned increase in payout rate. There could likely be other factors that could drive future ROE growth.

Summary

Overall, we believe the performance of EuroEyes International Eye Clinic has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.