Does the impressive performance of shares of Universal Health Services, Inc. (NYSE:UHS) have something to do with its fundamentals?

Universal Health Services (NYSE:UHS) stock is up 39% in the past month. We wonder if and what role company finances play in this price change, as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study the ROE of Universal Health Services in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for universal health services

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 formula above, the ROE for universal health services is:

12% = $721 million ÷ $5.9 billion (based on trailing 12 months to September 2022).

“Yield” is the income the business has earned over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.12 in profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

A Side-by-Side Comparison of Universal Health Benefits Growth and ROE of 12%

For starters, Universal Health Services’ ROE looks acceptable. Additionally, the company’s ROE is similar to the industry average of 13%. Universal Health Services’ decent returns are not reflected in Universal Health Services’ lackluster five-year net income growth average of 4.6%. We believe that low growth, when returns are moderate, could be the result of certain circumstances such as low earnings retention or poor capital allocation.

We then benchmarked Universal Health Services’ net income growth against the industry and found that the company’s growth figure is below the industry average growth rate of 16% over the same period. , which is a little worrying.

NYSE: UHS Past Earnings Growth November 24, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Has the market priced in the future prospects of UHS? You can find out in our latest infographic research report on intrinsic value.

Are universal health services using their benefits effectively?

A low three-year median payout ratio of 6.6% (implying that the company retains the remaining 93% of its revenue) suggests that Universal Health Services retains most of its profits. However, the low revenue growth figure does not reflect this fact. So there could be another explanation for this. For example, the company’s business may deteriorate.

Additionally, Universal Health Services has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 6.1%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 13%.

Conclusion

Overall, we believe that universal health services certainly have positive factors to consider. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe that there could be external factors that could negatively impact the business. The latest forecasts from industry analysts show that the company should maintain its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

Valuation is complex, but we help make it simple.

Find out if Universal health services is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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.

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