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Is IDACORP, Inc.'s (NYSE:IDA) Recent Performancer Underpinned By Weak Financials?

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IDACORP (NYSE:IDA) has had a rough month with its share price down 5.5%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on IDACORP's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for IDACORP

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

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

9.2% = US$247m ÷ US$2.7b (Based on the trailing twelve months to March 2022).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

IDACORP's Earnings Growth And 9.2% ROE

At first glance, IDACORP's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.2%, so we won't completely dismiss the company. Having said that, IDACORP has shown a meagre net income growth of 3.9% over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

As a next step, we compared IDACORP'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 5.5% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about IDACORP's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is IDACORP Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 57% (that is, the company retains only 43% of its income) over the past three years for IDACORP suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, IDACORP has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 62% of its profits over the next three years. Accordingly, forecasts suggest that IDACORP's future ROE will be 9.0% which is again, similar to the current ROE.

Summary

On the whole, IDACORP's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.