The fundamentals of Universal Health Services, Inc. (NYSE: UHS) look pretty strong: Could the market be wrong about the stock?

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It’s hard to get excited after looking at the recent performance of Universal Health Services (NYSE: UHS), as its stock has fallen 8.5% in the past week. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward financially healthy companies. . In this article, we have decided to focus on the ROE of Universal Health Services.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest review for universal health services

How is the ROE calculated?

the formula for ROE is:

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

So, based on the above formula, the ROE for universal health services is:

15% = US $ 1.0 billion ÷ US $ 6.6 billion (based on the last twelve months to March 2021).

The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.15 in profit.

Why is ROE important for profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion 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 other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Growth in Universal Health Services Profits and 15% ROE

For starters, the ROE of Universal Health Services seems acceptable. Even compared to the industry average of 16%, the company’s ROE looks pretty decent. This certainly adds context to the moderate 5.1% net income growth in Universal Health Services observed over the past five years.

Then, comparing with the industry’s net income growth, we found that the reported growth of universal health services was lower than the industry’s growth by 13% over the same period, which was not is not something we like to see.

NYSE: UHS Past Profit Growth June 21, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is the UHS valued enough? This intrinsic business value infographic has everything you need to know.

Are universal health services making efficient use of their profits?

Universal Health Services has a low three-year median payout ratio of 4.7%, which means the company keeps the remaining 95% of its profits. This suggests that management is reinvesting most of the profits to grow the business.

In addition, Universal Health Services has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 6.5% over the next three years. Either way, the ROE is not expected to change much for the company despite the expected higher payout ratio.

summary

Overall, we are quite satisfied with the performance of Universal Health Services. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. As a result, its decent profit growth is not surprising. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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