It is hard to get excited after looking at Hims & Hers Health’s (NYSE:HIMS) recent performance, when its stock has declined 34% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Hims & Hers Health’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Hims & Hers Health is:
26% = US$126m ÷ US$477m (Based on the trailing twelve months to December 2024).
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 $0.26 in profit.
View our latest analysis for Hims & Hers Health
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Hims & Hers Health’s Earnings Growth And 26% ROE
Firstly, we acknowledge that Hims & Hers Health has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. So, the substantial 38% net income growth seen by Hims & Hers Health over the past five years isn’t overly surprising.
As a next step, we compared Hims & Hers Health’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.1%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Hims & Hers Health fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Hims & Hers Health Efficiently Re-investing Its Profits?
Hims & Hers Health doesn’t pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.
Summary
On the whole, we feel that Hims & Hers Health’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.