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Has Ingenia Communities Group (ASX:INA) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Simply Wall St
·4 min read

Most readers would already know that Ingenia Communities Group's (ASX:INA) stock increased by 8.6% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Ingenia Communities Group's ROE in this article.

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.

Check out our latest analysis for Ingenia Communities Group

How Is ROE Calculated?

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 Ingenia Communities Group is:

3.3% = AU$31m ÷ AU$943m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.03.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Ingenia Communities Group's Earnings Growth And 3.3% ROE

It is quite clear that Ingenia Communities Group's ROE is rather low. Even when compared to the industry average of 6.6%, the ROE figure is pretty disappointing. However, the moderate 5.1% net income growth seen by Ingenia Communities Group over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Ingenia Communities Group's reported growth was lower than the industry growth of 8.5% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Ingenia Communities Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ingenia Communities Group Making Efficient Use Of Its Profits?

Ingenia Communities Group has a healthy combination of a moderate three-year median payout ratio of 43% (or a retention ratio of 57%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Ingenia Communities Group has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 48% of its profits over the next three years. Regardless, the future ROE for Ingenia Communities Group is predicted to rise to 8.7% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Ingenia Communities Group has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.