Should Weakness in Image Scan Holdings plc's (LON:IGE) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Image Scan Holdings (LON:IGE) has had a rough week with its share price down 15%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. 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.

Check out our latest analysis for Image Scan Holdings

How Do You Calculate Return On Equity?

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 Image Scan Holdings is:

9.8% = UK£138k ÷ UK£1.4m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.10 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. 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. 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.

A Side By Side comparison of Image Scan Holdings' Earnings Growth And 9.8% ROE

To begin with, Image Scan Holdings seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 8.6%. Given the circumstances, we can't help but wonder why Image Scan Holdings saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by18% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Image Scan Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Image Scan Holdings Making Efficient Use Of Its Profits?

Summary

On the whole, we do feel that Image Scan Holdings has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Image Scan Holdings' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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