Yahoo Finance Are Ibstock plc's (LON:IBST) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
Ibstock (LON:IBST) has had a rough three months with its share price down 6.4%. 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 Ibstock's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Ibstock
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 Ibstock is:
17% = UK£68m ÷ UK£414m (Based on the trailing twelve months to June 2023).
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 £0.17 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Ibstock's Earnings Growth And 17% ROE
At first glance, Ibstock seems to have a decent ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Ibstock's meagre five year net income growth average of 2.2%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Ibstock'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 12% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Ibstock is trading on a high P/E or a low P/E, relative to its industry.
Is Ibstock Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 51% (that is, the company retains only 49% of its income) over the past three years for Ibstock suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, Ibstock has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. Regardless, Ibstock's ROE is speculated to decline to 13% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we do feel that Ibstock has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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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.
