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Most readers already know that IMI (LON: IMI) stock is up 3.3% in the past three months. Since the market typically pays for a company’s long-term financial health, we decided to examine the company’s fundamentals to see if it could affect the market. We’re going to pay special attention to IMI’s ROE today.
Return on Equity, or ROE, is an important factor to consider as a shareholder telling them how effectively their capital will be reinvested. In other words, it shows the company’s success in turning shareholder investments into profits.
Check out our latest analysis for IMI
How is the ROE calculated?
That Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for IMI is:
22% = UK £ 181m ÷ UK £ 826m (based on the last 12 months through June 2021).
The “return” is the amount earned after tax over the past twelve months. That means the company made £ 0.22 in profit for every £ 1 worth of equity.
What is the Relationship Between ROE and Earnings Growth?
We have already established that ROE is an efficient profitable measure of a company’s future earnings. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate a company’s earnings growth potential. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and retained earnings.
IMI earnings growth and 22% ROE
The first thing we like is that IMI has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 11%, which is quite remarkable. This likely paved the way for the modest 6.4% net income growth that IMI has seen over the past five years. growth
As a next step, we compared IMI’s net income growth to that of the industry and found that the company had similar growth compared to the industry’s average growth rate of 6.4% over the same period.
The basis for increasing the value of a company is largely linked to its earnings development. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). This then helps them determine whether the stock is placed for a bright or bleak future. Is IMI rated fairly compared to other companies? These 3 benchmarks can help you make a decision.
Is IMI using its profits efficiently?
While IMI has an average payout ratio of 65% for three years (which means 35% of profits are withheld), the company has still seen significant profit growth in the past, which means that its high payout ratio is increasing its ability to grow.
Additionally, IMI has been paying dividends over a period of at least a decade, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio is projected to decrease to 32% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change materially.
graduation
Overall, we are very satisfied with the performance of IMI. Particularly noteworthy is the high ROE and probably also the explanation for the substantial earnings growth. Still, the company keeps a small part of its profits. Which means that the company was still able to increase its profits, so that’s not a problem. However, given the latest analyst estimates, we’ve determined that the company’s earnings are likely to gain momentum. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks 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.
*Interactive Brokers is rated the cheapest broker by StockBrokers.com
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