IDP Education (ASX:IEL) has had a great run on the share market with its stock up by a significant 11% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to IDP Education's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
ROE 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 IDP Education is:
23% = AU$103m ÷ AU$455m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.23.
What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
IDP Education's Earnings Growth And 23% ROE
Firstly, we acknowledge that IDP Education has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 5.5% which is quite remarkable. This likely paved the way for the modest 6.7% net income growth seen by IDP Education over the past five years. growth
We then performed a comparison between IDP Education's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 6.7% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is IEL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is IDP Education Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 63% (or a retention ratio of 37%) for IDP Education suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, IDP Education has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%. Regardless, the future ROE for IDP Education is predicted to rise to 42% despite there being not much change expected in its payout ratio.
In total, we are pretty happy with IDP Education's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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