There are a few key reasons why I think the S&P/ASX 200 Index (ASX: XJO) share Pro Medicus Ltd (ASX: PME) is one of the highest-quality businesses around. Indeed, it may well be the highest-quality ASX 200 share.
Pro Medicus describes itself as a leading healthcare informatics company. It provides a "full range of medical imaging software and services to hospitals, imaging and healthcare groups worldwide".
The ASX 200 healthcare share has a number of positives going for it. Let's check them out below.
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Excellent profit margins
Pro Medicus is one of the most profitable businesses on the ASX. In the FY23 first half, it made $56.9 million of operating revenue, while reporting cost of sales of only $285,000. This is an extremely high gross profit margin.
It also reported it had an earnings before interest and tax (EBIT) margin of 66.1%.
What this shows is the software business makes a high level of operating profit on the revenue it generates. This is very attractive because it means a lot of its revenue is turned into net profit after tax (NPAT) which, in turn, can strengthen the balance sheet and/or be paid as dividends.
Any new revenue for the business is a large profit boost for the ASX 200 healthcare share, and that's going very well for the company.
Winning contracts and increasing prices
Pro Medicus shares are also benefiting from strong revenue growth over time. In HY23, revenue rose by 28.3% to $56.9 million.
The business continues winning large, multi-year deals with big health organisations in the US, as well as Europe.
For example, in mid-May, the company signed a seven-year, A$20 million deal with Gundersen Health System. Pro Medicus said the health organisation had signed up for a number of its software offerings through a transaction-based model, with potential upside.
Gundersen is a not-for-profit 'integrated delivery network' (IDN) comprising seven hospitals and 65 clinics across Wisconsin, Minnesota, and Iowa. The initial go-live is targeted for the second half of the 2023 calendar year.
When announcing this contract win, Pro Medicus CEO Dr Sam Hupert said the company has a belief that its solution is "equally well-suited to IDNs of all sizes" making its "total addressable market very significant".
In August 2022, Pro Medicus announced it had renewed a seven-year, A$15.5 million contract with the University of Florida. That contract was negotiated at a higher per-transaction cost than the original pay-per-view contract.
If the company can hang onto its customers, it could receive even greater revenue from them, which is promising for the future.
Excellent balance sheet
The ASX 200 share has a solid and regularly-improving balance sheet, which makes the company even more secure.
At the end of the first half of FY23, the company was debt free and had $94.5 million of cash and investments.
With such a strong financial position, the business is able to pay a healthy amount of its profit as dividends. In the FY23 half-year result, its profit after tax grew 31.5% to $27.2 million, while the interim dividend increased 30% to 13 cents per share.
The business could also use some of its cash to make future acquisitions or it could be used to fund growth into different regions or software areas.
Foolish takeaway
The market realises how great this business is, which is why it's priced so highly. According to the estimates on Commsec, it's valued at 89x FY24's estimated earnings.
While being one of the highest-quality ASX 200 shares, it's also one of the most expensive in price/earnings (P/E) ratio terms. I wouldn't describe today's value as a bargain. But the Pro Medicus share price could keep rising in the long-term if the company keeps growing profit by a good double-digit figure each year.
