Home health care was among the top 15 industries for return on equity (ROE) over the last 12 months, a financial statement analysis of privately held companies by financial information company Sageworks found, Forbes reported.
ROE is calculated by dividing annualized net income by total equity, and strong net income, low equity or a combination of both can drive high ROE.
Home health care services ranked No. 6, generating 65.9% ROE over the past 12 months ending Sept. 30 of this year, the Sageworks analysis found. Other industries that topped the list included legal services, offices of other health practitioners and dentists.
There were some key differences in private-company ROEs calculated by Sageworks from the returns of publicly traded companies, Forbes noted. The average ROE for companies in the Sageworks database for the past 12 months is 38%, compared with an average ROE of 10.4% in a study of 7,300 publicly traded companies by New York University finance professor Aswath Damodarana.
“Sageworks looks at pre-tax rather than after-tax net profit when calculating ROE because we think it gives a more accurate reading of private companies’ operational performance,” Sageworks analyst Libby Bierman told Forbes. “It’s how we avoid comparing apples to oranges in a database of companies from different states with different tax structures or with different tax-management practices.”
In addition, the analysis included the owner compensation in excess of market-rate salaries within net profit, another adjustment intended to more accurately portray the companies’ operational performance.
As an investment class with high ROE, home health care agencies are also seeing high valuations in the market, according to remarks by Jim Moskal, partner and global healthcare practice leader at M&A firm Livingstone Partners, at the Home Health Care News Summit in Chicago.
Written by Maggie Flynn