Ingenta plc (LON: ING) stock is performing well, but fundamentals look weak: what impact could this have on the stock?

Ingenta (LON: ING) shares rose a respectable 10% over the past week. In this article, however, we’ve chosen to focus on the weak fundamentals as a company’s long-term financial performance ultimately dictates market results. Today we will pay particular attention to Ingenta’s ROE.

Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it shows the company’s success in turning shareholder investments into profits.

Check out our latest analysis for Ingenta. at

How do you calculate the return on equity?

The ROE can be calculated using the formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

Based on the formula above, the ROE for Ingenta is:

7.2% = £ 274k ÷ £ 3.8m (based on the last 12 months ended June 2021).

The “return” is the annual profit. One way to conceptualize this is that for every £ 1 of shareholder equity the company made a profit of £ 0.07.

Why is ROE important to earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company will reinvest or “keep” we can then assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.

Ingenta earnings growth and 7.2% ROE

At first glance, Ingenta’s ROE doesn’t seem like much. Another brief study shows that the company’s ROE is also not cheap compared to the industry average of 12%. Given the circumstances, Ingenta’s sharp decline in net income of 39% over the past five years comes as no surprise. We believe there could be other issues that negatively affect the company’s earnings outlook. For example – low profit retention or poor capital allocation.

That being said, we compared Ingenta’s performance to the industry and were concerned to discover that while the company was shrinking its revenues, the industry was up 21% over the same period.

The basis for increasing the value of a company is largely linked to its earnings development. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. This then helps them determine whether the stock is placed for a bright or bleak future. Is Ingenta rated fairly compared to other companies? These 3 benchmarks can help you make a decision.

Is Ingenta using its retained earnings effectively?

Ingenta’s high LTM payout ratio (or past twelve months) of 153% suggests the company is using up its resources to keep its dividend payments going, and this is reflected in its declining earnings. It is usually very difficult to maintain dividend payments that are higher than reported earnings. You can see the 3 risks we have identified for Ingenta by checking out ours Risk dashboard for free on our platform here.

Additionally, Ingenta paid dividends over a five-year period, which means the company’s management is more focused on maintaining its dividend payments regardless of the declining earnings.

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Overall, we would be thinking about an investment measure in relation to Ingenta. In terms of earnings growth in particular, it has shown quite unsatisfactory performance, and poor ROE and reinvestment rates seem to be the cause of this inadequate performance. The latest forecasts from industry analysts therefore show that analysts expect a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.

This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.

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