Are Robust Financials Driving The Recent Rally In init innovation in traffic systems SE's (ETR:IXX) Stock?

Most readers would already be aware that init innovation in traffic systems' (ETR:IXX) stock increased significantly by 20% 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. Particularly, we will be paying attention to init innovation in traffic systems' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for init innovation in traffic systems

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 init innovation in traffic systems is:

15% = €13m ÷ €85m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.15 in profit.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

init innovation in traffic systems' Earnings Growth And 15% ROE

To start with, init innovation in traffic systems' ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. This certainly adds some context to init innovation in traffic systems' moderate 5.1% net income growth seen over the past five years.

We then compared init innovation in traffic systems' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.9% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about init innovation in traffic systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is init innovation in traffic systems Making Efficient Use Of Its Profits?

init innovation in traffic systems has a healthy combination of a moderate three-year median payout ratio of 39% (or a retention ratio of 61%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, init innovation in traffic systems is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. However, init innovation in traffic systems' ROE is predicted to rise to 18% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with init innovation in traffic systems' 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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