Is Integral Diagnostics Limited's (ASX:IDX) Stock's Recent Performance A Reflection Of Its Financial Health?

Integral Diagnostics' (ASX:IDX) stock is up by 4.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Integral Diagnostics' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Integral Diagnostics

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Integral Diagnostics is:

13% = AU$32m ÷ AU$253m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Integral Diagnostics' Earnings Growth And 13% ROE

At first glance, Integral Diagnostics seems to have a decent ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. Probably as a result of this, Integral Diagnostics was able to see a decent growth of 17% over the last five years.

As a next step, we compared Integral Diagnostics' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.2%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is IDX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Integral Diagnostics Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 77% (or a retention ratio of 23%) for Integral Diagnostics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Integral Diagnostics has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 60% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 17%, over the same period.

Conclusion

On the whole, we feel that Integral Diagnostics' performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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.
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