Will Weakness in IDP Education Limited's (ASX:IEL) Stock Prove Temporary Given Strong Fundamentals?

IDP Education (ASX:IEL) has had a rough three months with its share price down 9.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study IDP Education's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for IDP Education

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for IDP Education is:

26% = AU$134m ÷ AU$523m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

IDP Education's Earnings Growth And 26% ROE

Firstly, we acknowledge that IDP Education has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 5.6% which is quite remarkable. So, the substantial 23% net income growth seen by IDP Education over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that IDP Education's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is IDP Education fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is IDP Education Using Its Retained Earnings Effectively?

IDP Education has a significant three-year median payout ratio of 72%, meaning the company only retains 28% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, IDP Education has been paying dividends over a period of eight 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 73% of its profits over the next three years. As a result, IDP Education's ROE is not expected to change by much either, which we inferred from the analyst estimate of 28% for future ROE.

Conclusion

On the whole, we feel that IDP Education's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.