Integrated Diagnostics Holdings plc (LON:IDHC) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Integrated Diagnostics Holdings (LON:IDHC) has had a rough three months with its share price down 9.9%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Integrated Diagnostics Holdings' ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Integrated Diagnostics Holdings
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Integrated Diagnostics Holdings is:
35% = ج.م748m ÷ ج.م2.2b (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.35 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Integrated Diagnostics Holdings' Earnings Growth And 35% ROE
First thing first, we like that Integrated Diagnostics Holdings has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. So, the substantial 26% net income growth seen by Integrated Diagnostics Holdings over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Integrated Diagnostics Holdings' growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
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 Integrated Diagnostics Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Integrated Diagnostics Holdings Making Efficient Use Of Its Profits?
Integrated Diagnostics Holdings' significant three-year median payout ratio of 91% (where it is retaining only 9.1% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Besides, Integrated Diagnostics Holdings has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 74% of its profits over the next three years. Still, forecasts suggest that Integrated Diagnostics Holdings' future ROE will rise to 45% even though the the company's payout ratio is not expected to change by much.
Conclusion
In total, it does look like Integrated Diagnostics Holdings has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
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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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