Insteel Industries, Inc.'s (NYSE:IIIN) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Published
August 13, 2022
NYSE:IIIN
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Insteel Industries (NYSE:IIIN) has had a rough three months with its share price down 21%. 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 Insteel Industries' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Insteel Industries

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 Insteel Industries is:

34% = US$126m ÷ US$365m (Based on the trailing twelve months to July 2022).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.34 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Insteel Industries' Earnings Growth And 34% ROE

First thing first, we like that Insteel Industries has an impressive ROE. Secondly, even when compared to the industry average of 23% the company's ROE is quite impressive. So, the substantial 35% net income growth seen by Insteel Industries over the past five years isn't overly surprising.

We then compared Insteel Industries' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

past-earnings-growth
NYSE:IIIN Past Earnings Growth August 13th 2022

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Insteel Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Insteel Industries Making Efficient Use Of Its Profits?

Insteel Industries' three-year median payout ratio to shareholders is 7.5%, which is quite low. This implies that the company is retaining 93% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Insteel Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Insteel Industries' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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