Is Third Age Health Services Limited's (NZSE:TAH) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Third Age Health Services (NZSE:TAH) has had a great run on the share market with its stock up by a significant 38% 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 Third Age Health Services' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You 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 Third Age Health Services is:

59% = NZ$2.8m ÷ NZ$4.8m (Based on the trailing twelve months to September 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.59.

Check out our latest analysis for Third Age Health Services

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Third Age Health Services' Earnings Growth And 59% ROE

To begin with, Third Age Health Services has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.7% the company's ROE is quite impressive. So, the substantial 23% net income growth seen by Third Age Health Services over the past five years isn't overly surprising.

We then compared Third Age Health Services' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.6% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Third Age Health Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Third Age Health Services Using Its Retained Earnings Effectively?

Third Age Health Services' significant three-year median payout ratio of 72% (where it is retaining only 28% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Third Age Health Services has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Third Age Health Services' performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Third Age Health Services' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.