ID Logistics Group SA (EPA:IDL) shares have weakened lately, but the financial outlook seems correct: is the market wrong?
With its stock down 5.2% over the past week, it’s easy to ignore ID Logistics Group (EPA:IDL). 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. Concretely, we decided to study the ROE of ID Logistics Group in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Discover our latest analysis for ID Logistics Group
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the formula above, the ROE for ID Logistics Group is:
15% = €36m ÷ €245m (based on the last twelve months until June 2021).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every €1 of equity, the company was able to make €0.15 of profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of these earnings the company reinvests or “keeps”, and how effectively it does so, we are then able to assess a company’s earnings 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 ID Logistics Group’s earnings growth and 15% ROE
At first sight, ID Logistics Group seems to have a decent ROE. Even so, compared to the industry average ROE of 22%, we are not very enthusiastic. ID Logistics Group has still been able to record a decent growth in its net income of 10% over the past five years. Thus, there could be other aspects that positively influence earnings growth. Such as – high revenue retention or effective management in place. However, it’s worth remembering that the company has a decent ROE to start with, just that it’s below the industry average. So this also provides some context for the earnings growth the company is seeing.
As a next step, we compared ID Logistics Group’s net profit growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 13% over the of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if ID Logistics Group is trading on a high P/E or a low P/E, relative to its industry.
Does ID Logistics Group effectively reinvest its profits?
ID Logistics Group currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.
Overall, we believe that ID Logistics Group has positive assets. Specifically, we like that the company reinvests a large portion of its profits at a respectable rate of return. This of course led the company to see good growth in profits. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.