When Innospec Inc (NASDAQ:IOSP) released its most recent earnings update (31 March 2018), I wanted to understand how these figures stacked up against its past performance. The two benchmarks I used were Innospec’s average earnings over the past couple of years, and its industry performance. These are useful yardsticks to help me gauge whether or not IOSP actually performed well. Below is a quick commentary on how I see IOSP has performed. See our latest analysis for Innospec
How Well Did IOSP Perform?
IOSP’s trailing twelve-month earnings (from 31 March 2018) of US$66.80m has declined by -16.08% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 5.82%, indicating the rate at which IOSP is growing has slowed down. What could be happening here? Well, let’s look at what’s transpiring with margins and if the entire industry is experiencing the hit as well.
Revenue growth in the past couple of years, has been positive, however, earnings growth has failed to keep up meaning Innospec has been growing its expenses by a lot more. This hurts margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the US chemicals industry has been growing its average earnings by double-digit 15.35% in the prior twelve months, and a more subdued 6.25% over the past half a decade. This shows that whatever uplift the industry is profiting from, Innospec has not been able to gain as much as its industry peers.
In terms of returns from investment, Innospec has not invested its equity funds well, leading to a 8.10% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 5.06% is below the US Chemicals industry of 6.97%, indicating Innospec’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Innospec’s debt level, has declined over the past 3 years from 15.31% to 11.42%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 11.07% to 26.53% over the past 5 years.
What does this mean?
Though Innospec’s past data is helpful, it is only one aspect of my investment thesis. Generally companies that experience a drawn out period of reduction in earnings are going through some sort of reinvestment phase in order to keep up with the recent industry growth and disruption. You should continue to research Innospec to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IOSP’s future growth? Take a look at our free research report of analyst consensus for IOSP’s outlook.
- Financial Health: Is IOSP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 March 2018. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.