editorial-team@simplywallst.com (Simply Wall St)
4 min read
In This Article:
Innospec (NASDAQ:IOSP) has had a rough three months with its share price down 19%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Innospec’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 Innospec is:
2.9% = US$36m ÷ US$1.2b (Based on the trailing twelve months to December 2024).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.03 in profit.
See our latest analysis for Innospec
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
As you can see, Innospec’s ROE looks pretty weak. Even compared to the average industry ROE of 9.9%, the company’s ROE is quite dismal. Innospec was still able to see a decent net income growth of 13% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Innospec’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.3%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Innospec is trading on a high P/E or a low P/E , relative to its industry.
