Should IMI plc’s (LON:IMI) Recent Earnings Decline Worry You?

For long-term investors, assessing earnings trend over time and against industry benchmarks is more beneficial than examining a single earnings announcement at a point in time. Investors may find my commentary, albeit very high-level and brief, on IMI plc (LSE:IMI) useful as an attempt to give more color around how IMI is currently performing.

View our latest analysis for IMI

Commentary On IMI’s Past Performance

IMI’s trailing twelve-month earnings (from 31 December 2019) of UK£153m has declined by -9.5% compared to the previous year.

Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 0.4%, indicating the rate at which IMI is growing has slowed down. Why could this be happening? Well, let’s take a look at what’s going on with margins and whether the entire industry is facing the same headwind.

LSE:IMI Income Statement, March 9th 2020
LSE:IMI Income Statement, March 9th 2020

In terms of returns from investment, IMI has invested its equity funds well leading to a 22% return on equity (ROE), above the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 9.2% exceeds the GB Machinery industry of 7.1%, indicating IMI has used its assets more efficiently. However, its return on capital (ROC), which also accounts for IMI’s debt level, has declined over the past 3 years from 21% to 20%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 44% to 61% over the past 5 years.

What does this mean?

IMI’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. Typically companies that endure an extended period of reduction in earnings are going through some sort of reinvestment phase Though if the entire industry is struggling to grow over time, it may be a signal of a structural shift, which makes IMI and its peers a riskier investment. You should continue to research IMI to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for IMI’s future growth? Take a look at our free research report of analyst consensus for IMI’s outlook.
  2. Financial Health: Are IMI’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2019. This may not be consistent with full year annual report figures.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.