Stock Analysis

Wide Moat and High Returns Support InMode Ltd.'s NASDAQ:INMD) Valuation

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NasdaqGS:INMD
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InMode ( NASDAQ: INMD ) is having a breakthrough year. After a parabolic run-up, the market is starting to question its valuation. Yet, the company continues innovating and delivering value without even using any debt.

See our latest analysis for InMode .

Following a big run-up, InMode opted for a 2:1 share split. Although not a necessity in the times of fractional share ownership, share splits are still seen as bullish signs. Upon the announcement, shares jumped 2% in the premarket.

Meanwhile, the company launched EvolveX – a body contouring system. Chief Medical Officer Spero Theodorou called it a revolutionary system for non-invasive body contouring, praising the ability to adjust the procedures for individual patients in real-time. InMode is succeeding because it struck the gold on the middle ground. Finding the demographic that wants results that look comparable to plastic surgery but without the full surgical procedure.

According to Grand View Research, the non-invasive aesthetic treatment market is expected to grow at a 13.9% compound annual growth rate from 2021 to 2028.

Non-invasive aesthetic treatment market size in the U.S. Source: GrandViewResearch

Examining the Profitability

ROE or return on equity is a valuable tool to assess how effectively a company can generate returns on the investment it receives from its shareholders.In other words, it is a profitability ratio that measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for InMode is:

39% = US$128m ÷ US$331m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.39 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits.Based on how much of its profits the company chooses to reinvest or "retain," we can evaluate a company's future ability to generate profits.

Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily bear these characteristics.

InMode's Earnings Growth And 39% ROE

To begin with, InMode has a pretty high ROE which is interesting.Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed.

So, the substantial 55% net income growth seen by InMode over the past five years isn't overly surprising.

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

past-earnings-growth
NasdaqGS: INMD Past Earnings Growth October 2nd, 2021

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

Is InMode Making Efficient Use Of Its Profits?

InMode doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

InMode currently has many traits of a high-quality business:

  • High growth
  • High margins
  • Pristine balance sheet
  • High Insider ownership

In particular, it's great to see that the company is investing heavily into its business, along with a high rate of return.

Although no company can dominate the market forever, as competitors eventually pressure the margins down, InMode has patents and a highly competent management team to keep the pole position in this market.

Yet, the company's earnings growth is expected to slow down, as the current analyst estimates forecast. Are these analysts' expectations based on the general expectations for the industry or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

What are the risks and opportunities for InMode?

InMode Ltd. designs, develops, manufactures, and markets minimally invasive aesthetic medical products based on its proprietary radiofrequency assisted lipolysis and deep subdermal fractional radiofrequency technologies in the United States and internationally.

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Rewards

  • Trading at 38.2% below our estimate of its fair value

  • Earnings are forecast to grow 14.76% per year

  • Earnings grew by 18.9% over the past year

Risks

  • Shareholders have been diluted in the past year

View all Risks and Rewards

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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.

About NasdaqGS:INMD

InMode

InMode Ltd. designs, develops, manufactures, and markets minimally invasive aesthetic medical products based on its proprietary radiofrequency assisted lipolysis and deep subdermal fractional radiofrequency technologies in the United States and internationally.

Very undervalued with flawless balance sheet.