ITV plc (LON: ITV) stock has shown weakness lately, but the financial outlook looks good: is the market wrong?


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ITV (LON: ITV) had a difficult month with a price loss of 4.0%. However, stock prices are usually determined by a company’s financial metrics over the long term, which look pretty handsome in this case. We’re going to pay special attention to ITV’s ROE today.

Return on Equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. Put simply, it evaluates the profitability of a company in relation to its equity.

Check out our latest analysis for ITV

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

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

24% = £ 281m ÷ £ 1.2b (based on the last 12 months ended December 2020).

The “return” is the income that the company has earned over the past year. Another way to imagine this is that for every £ 1 worth of equity, the company was able to make a profit of £ 0.24.

Why is ROE important to earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. 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.

ITV earnings growth and 24% ROE

First off, ITV has a pretty high ROE, which is interesting. Second, a comparison with the industry’s average ROE of 8.0% does not go unnoticed. As you might expect, ITV’s reported 6.3% decline in net income does not bode well for us. So there could be some other aspects that could explain this. For example, the company pays out a large part of its profits as dividends or faces competitive pressures.

However, when we compared ITV’s growth to the industry, we found that while the company’s earnings were shrinking, the industry had earnings growth of 2.2% over the same period. That’s pretty worrying.

LSE: ITV Past Earnings Growth July 14, 2021

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. That way, they’ll have an idea of ​​whether the stock is getting into clear blue water or expecting boggy water. Has the market priced in the future prospects for ITV? Find out in our latest intrinsic value infographic research report.

Is ITV Using Its Profits Efficiently?

While the company has paid out part of its dividend in the past, it currently doesn’t pay a dividend. This implies that potentially all profits will be reinvested in the company.

Conclusion

By and large, we think ITV has some positive qualities. However, given the high ROE and high earnings retention, we expect strong earnings growth for the company, but that’s not the case here. This suggests that there may be an external threat to the company that is holding back its growth. The latest forecasts from industry analysts therefore show that analysts expect a huge improvement in the company’s earnings growth rate. To learn more about the company’s future earnings growth projections, take a look at this free Report on analyst forecast for the company to learn more.

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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 offer you long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest company announcements or quality material, which is sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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About Nina Snider

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