Inter Cars' (WSE:CAR) stock is up by a considerable 19% 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. Specifically, we decided to study Inter Cars' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
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 Inter Cars is:
17% = zł423m ÷ zł2.5b (Based on the trailing twelve months to March 2021).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.17.
What Has ROE Got To Do With 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 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.
Inter Cars' Earnings Growth And 17% ROE
To begin with, Inter Cars seems to have a respectable ROE. Even when compared to the industry average of 16% the company's ROE looks quite decent. This certainly adds some context to Inter Cars' moderate 10% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Inter Cars' reported growth was lower than the industry growth of 13% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Inter Cars''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Inter Cars Efficiently Re-investing Its Profits?
Inter Cars has a low three-year median payout ratio of 4.5%, meaning that the company retains the remaining 95% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Inter Cars has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 26% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
On the whole, we feel that Inter Cars' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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