Yahoo Finance Could The Market Be Wrong About The Interpublic Group of Companies, Inc. (NYSE:IPG) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at Interpublic Group of Companies' (NYSE:IPG) recent performance, when its stock has declined 13% over the past three months. 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 Interpublic Group of Companies' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Interpublic Group of Companies
How Is ROE Calculated?
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 Interpublic Group of Companies is:
25% = US$927m ÷ US$3.7b (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.25.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Interpublic Group of Companies' Earnings Growth And 25% ROE
Firstly, we acknowledge that Interpublic Group of Companies has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. This probably laid the groundwork for Interpublic Group of Companies' moderate 13% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Interpublic Group of Companies' growth is quite high when compared to the industry average growth of 7.3% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Interpublic Group of Companies is trading on a high P/E or a low P/E, relative to its industry.
Is Interpublic Group of Companies Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Interpublic Group of Companies suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Interpublic Group of Companies has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 44%. Accordingly, forecasts suggest that Interpublic Group of Companies' future ROE will be 27% which is again, similar to the current ROE.
Conclusion
On the whole, we feel that Interpublic Group of Companies' performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
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