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Is the strong financial outlook the force driving the momentum in Innospec Inc. shares NASDAQ:IOSP)?
Most readers already know that Innospec (NASDAQ:IOSP) shares rose significantly by 6.9% last month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health typically dictates market outcomes. Specifically, we decided to study Innospec ROE in this article.
Return on equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
Check out our latest analysis for Innospec
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Innospec’s ROE is:
12% = US$147m ÷ US$1.2b (Based on trailing twelve months to March 2024).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every US$1 of investment by its shareholders, the company generates a profit of US$0.12.
Why is ROE important for earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we will then be able to assess a company’s earnings growth potential. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Innospec earnings growth and ROE of 12%
For starters, Innospec’s ROE looks acceptable. And comparing with the industry, we found that the industry average ROE is similar at 10%. This certainly adds some context to Innospec’s moderate 14% net profit growth seen over the past five years.
As a next step, we compared Innospec’s net profit growth to the industry and found that the company has a similar growth number when compared to the industry average growth rate of 14% over the same period.
past profit growth
Earnings growth is an important factor in stock valuation. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. Doing so will give you an idea of whether the action is heading towards clear blue waters or if swampy waters await. If you’re wondering about Innospec’s valuation, check out this indicator of your price/earnings ratiocompared to your industry.
The story continues
Is Innospec making efficient use of its profits?
Innospec has a healthy combination of a moderate three-year median payout ratio of 26% (or a retention ratio of 74%) and respectable earnings growth, as we saw above, which means the company has been making efficient use of of your profits.
Furthermore, Innospec is determined to continue sharing its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.
Summary
Overall, we feel that Innospec’s performance has been very good. In particular, it is great to see that the company is investing heavily in its business and, together with a high rate of return, this has resulted in considerable growth in its profits. The latest forecasts from industry analysts show that the company is expected to maintain its current growth rate. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.