Will Weakness in IGG Inc's (HKG:799) Stock Prove Temporary Given Strong Fundamentals?

IGG (HKG:799) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on IGG's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for IGG

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 IGG is:

49% = US$227m ÷ US$463m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.49 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.

IGG's Earnings Growth And 49% ROE

Firstly, we acknowledge that IGG has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. So, the substantial 29% net income growth seen by IGG over the past five years isn't overly surprising.

We then performed a comparison between IGG's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 32% 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. 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 IGG's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is IGG Using Its Retained Earnings Effectively?

IGG has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and IGG is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, IGG is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 32%. Regardless, IGG's ROE is speculated to decline to 29% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with IGG'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 substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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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