Is The Market Rewarding Advanced Medical Solutions Group plc (LON:AMS) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

Simply Wall St

Sat, Apr 23, 2022, 3:16 AM 4 min read

Advanced Medical Solutions Group (LON:AMS) has had a rough week with its share price down 8.1%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Advanced Medical Solutions Group's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Advanced Medical Solutions Group

How Is ROE Calculated?

The formula for ROE 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% = UK£17m ÷ UK£213m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Advanced Medical Solutions Group's Earnings Growth And 8.2% ROE

At first glance, Advanced Medical Solutions Group's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.4%, we may spare it some thought. But Advanced Medical Solutions Group saw a five year net income decline of 7.4% over the past five years. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

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 has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.0% in the same period.

past-earnings-growth — AIM:AMS Past Earnings Growth April 23rd 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is AMS worth today? The intrinsic value infographic in our free research report helps visualize whether AMS is currently mispriced by the market.

Is Advanced Medical Solutions Group Using Its Retained Earnings Effectively?

When we piece together Advanced Medical Solutions Group's low three-year median payout ratio of 24% (where it is retaining 76% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Advanced Medical Solutions Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years. However, Advanced Medical Solutions Group's ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we're a bit ambivalent about Advanced Medical Solutions Group's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only 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, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.