Weak financial outlook appears to weigh on shares of Raffles Medical Group Ltd (SGX:BSL)

With its stock down 8.8% over the past three months, it’s easy to overlook Raffles Medical Group (SGX:BSL). Since stock prices are usually influenced by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the company’s key financial indicators. Specifically, we decided to study the ROE of Raffles Medical Group 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 simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Raffles Medical Group

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for Raffles Medical Group is:

8.6% = $84 million ÷ $977 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. This means that for every SGD1 of equity, the company generated 0.09 SGD of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

Profit growth and ROE of 8.6% at Raffles Medical Group

At first glance, there isn’t much to say about Raffles Medical Group’s ROE. Then, compared to the industry average ROE of 12%, the company’s ROE leaves us even less excited. Therefore, the stable earnings seen by Raffles Medical Group over the past five years could likely be the result of lower ROE.

We then compared Raffles Medical Group’s net profit growth with the industry and found that the company’s growth figure is below the industry average growth rate of 15% over the same period, which is a little worrying.

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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. This then helps them determine if the stock is positioned for a bright or bleak future. Is the BSL correctly valued? This intrinsic business value infographic has everything you need to know.

Does Raffles Medical Group effectively reinvest its profits?

With a high three-year median payout ratio of 68% (implying the company retains only 32% of its revenue) from its business to reinvest in its business), most of Raffles Medical Group’s profits are paid to shareholders, which explains the lack of revenue growth.

Additionally, Raffles Medical Group 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 is expected to drop to 49% over the next three years. Either way, ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

Overall, the performance of Raffles Medical Group is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. 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.