Yahoo Finance Is Irish Continental Group plc's (LON:ICGC) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Most readers would already be aware that Irish Continental Group's (LON:ICGC) stock increased significantly by 19% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Irish Continental Group's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Irish Continental Group
How To Calculate Return On Equity?
Return on equity 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 Irish Continental Group is:
22% = €62m ÷ €282m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.22 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
A Side By Side comparison of Irish Continental Group's Earnings Growth And 22% ROE
Firstly, we acknowledge that Irish Continental Group has a significantly high ROE. Additionally, a comparison with the average industry ROE of 22% also portrays the company's ROE in a good light. However, for some reason, the higher returns aren't reflected in Irish Continental Group's meagre five year net income growth average of 2.4%.Despite this, Irish Continental Group's five year net income growth was quite low averaging at only 2.4%.Yet, Irish Continental Group has posted measly growth of 2.4% over the past five years. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Irish Continental Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 51% in the same period.
Earnings growth is a huge factor in stock valuation. 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. What is ICGC worth today? The intrinsic value infographic in our free research report helps visualize whether ICGC is currently mispriced by the market.
Is Irish Continental Group Efficiently Re-investing Its Profits?
While Irish Continental Group has a decent three-year median payout ratio of 42% (or a retention ratio of 58%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Irish Continental Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Summary
In total, it does look like Irish Continental Group has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. To know the 1 risk we have identified for Irish Continental Group visit our risks dashboard for free.
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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.