Incitec Pivot Limited (ASX:IPL) Shares have slipped but fundamentals look decent: will the market correct the share price going forward?

It’s hard to get excited after watching the recent performance of Incitec Pivot (ASX:IPL), as its stock is down 13% in the past three months. 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. In this article, we decided to focus on the ROE of Incitec Pivot.

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 Incitec Pivot

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Incitec Pivot is:

9.0% = AU$497 million ÷ AU$5.5 billion (based on trailing 12 months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every Australian dollar of equity, the company generated a profit of 0.09 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge 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 Incitec Pivot’s earnings growth and ROE of 9.0%

When you first look at it, Incitec Pivot’s ROE doesn’t look that appealing. However, the fact that its ROE is well above the industry average of 5.4% does not go unnoticed by us. But again, seeing that Incitec Pivot’s net income has declined by 2.5% over the past five years makes us think again. Keep in mind that the company has a slightly low ROE. It’s just that the industry’s ROE is lower. So that could be one of the factors slowing earnings growth.

So, in a next step, we benchmarked Incitec Pivot’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 22 % over the same period.

ASX: IPL Past Earnings Growth July 1, 2022

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. What is IPL worth today? The intrinsic value infographic in our free research report helps visualize whether IPL is currently being mispriced by the market.

Does Incitec Pivot make effective use of its retained earnings?

Despite a three-year normal median payout ratio of 50% (where it keeps 50% of its earnings), Incitec Pivot has seen declining earnings, as seen above. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Furthermore, Incitec Pivot has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. company. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 55%. As a result, Incitec Pivot’s ROE is not expected to change much either, which we inferred from analysts’ estimate of 8.6% for future ROE.

Summary

All in all, it seems that Incitec Pivot has positive aspects for its activity. However, although the company has a decent ROE and high earnings retention, its earnings growth figure is quite disappointing. This suggests that there could be an external threat to the business, which is hampering growth. Moreover, the latest forecasts from industry analysts show that analysts expect the company’s earnings to continue to decline in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

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