Are Strong Financial Prospects The Force That Is Driving The Momentum In The Ensign Group, Inc.'s NASDAQ:ENSG) Stock?

Ensign Energy -1.83% Pre

Ensign Energy

ENSG

116.75

116.75

-1.83%

0.00% Pre

Ensign Group (NASDAQ:ENSG) has had a great run on the share market with its stock up by a significant 21% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Ensign Group's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Ensign Group

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

17% = US$249m ÷ US$1.5b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.

What Has ROE Got To Do With 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Ensign Group's Earnings Growth And 17% ROE

To begin with, Ensign Group seems to have a respectable ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This certainly adds some context to Ensign Group's exceptional 27% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Ensign Group's growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:ENSG Past Earnings Growth January 30th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. Is ENSG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ensign Group Efficiently Re-investing Its Profits?

Ensign Group has a really low three-year median payout ratio of 5.9%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Ensign Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Ensign Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with Ensign Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings.

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