Yahoo Finance Is IDACORP, Inc.'s (NYSE:IDA) Recent Performance Underpinned By Weak Financials?
IDACORP (NYSE:IDA) has had a rough three months with its share price down 9.0%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study IDACORP's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for IDACORP
How To Calculate Return On Equity?
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 IDACORP is:
9.0% = US$262m ÷ US$2.9b (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.09 in profit.
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.
IDACORP's Earnings Growth And 9.0% ROE
On the face of it, IDACORP's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 9.0%, we may spare it some thought. On the other hand, IDACORP reported a fairly low 3.8% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that IDACORP's reported growth was lower than the industry growth of 5.4% over the last few years, which is not something we like to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. What is IDA worth today? The intrinsic value infographic in our free research report helps visualize whether IDA is currently mispriced by the market.
Is IDACORP Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 59% (that is, the company retains only 41% of its income) over the past three years for IDACORP suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, IDACORP has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 9.1%.
Summary
In total, we would have a hard think before deciding on any investment action concerning IDACORP. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.