Advertisement
Australia markets open in 3 hours 40 minutes
  • ALL ORDS

    7,935.70
    -99.20 (-1.23%)
     
  • AUD/USD

    0.6615
    -0.0037 (-0.55%)
     
  • ASX 200

    7,665.60
    -101.10 (-1.30%)
     
  • OIL

    79.02
    -0.81 (-1.01%)
     
  • GOLD

    2,337.30
    -19.20 (-0.81%)
     
  • Bitcoin AUD

    101,600.27
    -1,837.86 (-1.78%)
     
  • CMC Crypto 200

    1,446.66
    -38.03 (-2.56%)
     

Is IPH Limited's (ASX:IPH) Stock On A Downtrend As A Result Of Its Poor Financials?

With its stock down 8.2% over the past month, it is easy to disregard IPH (ASX:IPH). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study IPH's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for IPH

How Do You Calculate Return On Equity?

The formula for return on equity is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for IPH is:

9.1% = AU$57m ÷ AU$624m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.09.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of IPH's Earnings Growth And 9.1% ROE

At first glance, IPH's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 19%. Thus, the low net income growth of 3.2% seen by IPH over the past five years could probably be the result of the low ROE.

As a next step, we compared IPH's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.3% in the same period.

past-earnings-growth
past-earnings-growth

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for IPH? You can find out in our latest intrinsic value infographic research report.

Is IPH Making Efficient Use Of Its Profits?

IPH's very high three-year median payout ratio of 123% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. This is indicative of risk. To know the 4 risks we have identified for IPH visit our risks dashboard for free.

In addition, IPH has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 76% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 21%, over the same period.

Summary

On the whole, IPH's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.