HealthStream (NASDAQ:HSTM) has had a rough three months with its share price down 11%. 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.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for HealthStream is:
5.9% = US$21m ÷ US$349m (Based on the trailing twelve months to September 2025).
The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.
Check out our latest analysis for HealthStream
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.
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 5.3%. Even so, HealthStream has shown a fairly decent growth in its net income which grew at a rate of 18%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing HealthStream’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 17% over the last few years.
Earnings growth is a huge factor in stock valuation. 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.
