Stock Analysis

Do Its Financials Have Any Role To Play In Driving IES Holdings, Inc.'s (NASDAQ:IESC) Stock Up Recently?

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NasdaqGM:IESC
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IES Holdings (NASDAQ:IESC) has had a great run on the share market with its stock up by a significant 47% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on IES Holdings' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for IES Holdings

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for IES Holdings is:

14% = US$41m ÷ US$285m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.14 in profit.

Why Is ROE Important For 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 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.

A Side By Side comparison of IES Holdings' Earnings Growth And 14% ROE

To start with, IES Holdings' ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. As you might expect, the 13% net income decline reported by IES Holdings is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

So, as a next step, we compared IES Holdings' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% in the same period.

past-earnings-growth
NasdaqGM:IESC Past Earnings Growth January 29th 2021

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if IES Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is IES Holdings Making Efficient Use Of Its Profits?

Summary

On the whole, we do feel that IES 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for IES Holdings by visiting our risks dashboard for free on our platform here.

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What are the risks and opportunities for IES Holdings?

IES Holdings, Inc. designs and installs integrated electrical and technology systems, and provides infrastructure products and services in the United States.

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Risks

  • Profit margins (1.4%) are lower than last year (4.3%)

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