Stock Analysis

Does The Market Have A Low Tolerance For Image Scan Holdings Plc's (LON:IGE) Mixed Fundamentals?

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AIM:IGE
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Image Scan Holdings (LON:IGE) has had a rough week with its share price down 10.0%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Image Scan Holdings' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Image Scan Holdings

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 Image Scan Holdings is:

7.3% = UK£96k ÷ UK£1.3m (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.07 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Image Scan Holdings' Earnings Growth And 7.3% ROE

On the face of it, Image Scan Holdings' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.0%. But then again, Image Scan Holdings' five year net income shrunk at a rate of 25%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 6.7% in the same period, we found that Image Scan Holdings' performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
AIM:IGE Past Earnings Growth October 1st 2022

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Image Scan Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Image Scan Holdings Making Efficient Use Of Its Profits?

Image Scan Holdings doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about Image Scan Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Image Scan Holdings.

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About AIM:IGE

Image Scan Holdings

Image Scan Holdings Plc manufactures and sells portable X-ray systems for security and counter terrorism applications in the United Kingdom, Europe, the Middle East, Africa, Asia, and the Americas.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance1
Financial Health6
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and slightly overvalued.