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It is hard to get excited after looking at HealthStream's (NASDAQ:HSTM) recent performance, when its stock has declined 8.5% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on HealthStream's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for HealthStream
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for HealthStream is:
5.6% = US$20m ÷ US$359m (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
HealthStream's Earnings Growth And 5.6% ROE
On the face of it, HealthStream's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.6%. Having said that, HealthStream has shown a modest net income growth of 6.8% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that HealthStream's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is HSTM worth today? The intrinsic value infographic in our free research report helps visualize whether HSTM is currently mispriced by the market.