Are Robust Financials Driving The Recent Rally In iA Financial Corporation Inc.'s (TSE:IAG) Stock?
iA Financial's (TSE:IAG) stock is up by a considerable 17% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to iA Financial's ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for iA Financial
How Is ROE Calculated?
ROE 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 iA Financial is:
11% = CA$816m ÷ CA$7.1b (Based on the trailing twelve months to September 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.11 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
iA Financial's Earnings Growth And 11% ROE
To start with, iA Financial's ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. This certainly adds some context to iA Financial's moderate 8.8% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that iA Financial's reported growth was lower than the industry growth of 24% in the same period, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is IAG worth today? The intrinsic value infographic in our free research report helps visualize whether IAG is currently mispriced by the market.
Is iA Financial Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that iA Financial is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Besides, iA Financial has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. As a result, iA Financial's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.
In total, we are pretty happy with iA Financial's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
iA Financial Corporation Inc., through its subsidiary, Industrial Alliance Insurance and Financial Services Inc., provides various life and health insurance products in Canada and the United States.
Established dividend payer and good value.