It’s hard to get excited after watching IXICO’s (LON:IXI) recent performance, as its stock is down 6.6% in the past month. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. Specifically, we decided to study IXICO’s ROE in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for IXICO
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for IXICO is:
8.2% = UK£949,000 ÷ UK£12 million (based on trailing 12 months to March 2022).
The “return” is the annual profit. This therefore means that for every pound invested by its shareholder, the company generates a profit of 0.08 pounds.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of IXICO’s earnings growth and ROE of 8.2%
At first glance, there is not much to say about IXICO’s ROE. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 12%. However, we are pleasantly surprised to see that IXICO has increased its net profit at a significant rate of 71% over the past five years. Therefore, there could be other reasons behind this growth. For example, the business has a low payout ratio or is efficiently managed.
We then performed a comparison between IXICO’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 60% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is IXICO correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does IXICO effectively reinvest its profits?
IXICO currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
Overall, we think IXICO certainly has some positive factors to consider. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 2 risks we identified for IXICO.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.