With its stock down 5.9% over the past month, it is easy to disregard Image Resources (ASX:IMA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Image Resources' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How To Calculate Return On Equity?
ROE 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 Image Resources is:
15% = AU$14m ÷ AU$92m (Based on the trailing twelve months to June 2021).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.15.
What Has ROE Got To Do With 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 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.
A Side By Side comparison of Image Resources' Earnings Growth And 15% ROE
At first glance, Image Resources seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Image Resources' exceptional 61% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Image Resources' growth is quite high when compared to the industry average growth of 24% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Image Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Image Resources Making Efficient Use Of Its Profits?
The really high three-year median payout ratio of 103% for Image Resources suggests that the company is paying its shareholders more than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 2 risks we have identified for Image Resources.
While Image Resources has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
On the whole, we do feel that Image Resources has some positive attributes. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Image Resources and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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.
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