Inter Cars (WSE: CAR) has had a great run for the past three months, with the stock market up 17% higher. Given that the market rewards strong financial stocks over the long term, we wonder if this is the case in this case. Specifically, we decided to study Inter Cars’ ROE in this article.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In simpler terms, it measures a company’s profitability in relation to its equity.
Check out our latest analysis for Inter Cars
How do you calculate the return on equity?
the Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Inter Cars is:
18% = 477 million zÅ Ã· 2.6 billion zÅ (based on the last twelve months to June 2021).
The “return” is the annual profit. One way to conceptualize this is that for every PLN 1 of shareholder capital, the company made a profit of PLN 0.18.
What is the Relationship Between ROE and Earnings Growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company will reinvest or “keep” we can then assess a company’s future ability to generate profits. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.
A side-by-side comparison of Inter Cars’ earnings growth and 18% ROE
At first glance, Inter Cars seems to have a decent ROE. Even compared to the industry average of 16%, the company’s ROE looks pretty decent. Consequently, this should have laid the foundation for Inter Carsâs decent 13% growth over the past five years.
As a next step, we compared Inter Cars’ net profit growth to that of the industry and found that the company had similar growth compared to the industry’s average growth rate of 13% over the same period.
The basis for increasing the value of a company is largely linked to its earnings development. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. This then helps them determine whether the stock is placed for a bright or bleak future. A 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 outlook. So you should check to see if Inter Cars is trading at high P / E or low P / E ratios compared to its industry.
Does Inter Cars use the retained profits effectively?
In the case of Inter Cars, the respectable profit growth can probably be attributed to the low average payout ratio of 4.5% (or company.
In addition, Inter Cars is determined to continue to share its profits with shareholders, which we conclude from its long history of nine years of dividend payouts. If we look at the latest analyst consensus data, we can see that the company’s future payout ratio is projected to climb to 33% over the next three years. Regardless of this, it is expected that the ROE will not change significantly for the company despite the higher expected payout ratio.
Overall, we’re pretty happy with Inter Cars’ performance. We particularly like the fact that the company is massively reinvesting in its business and doing so with high returns. Unsurprisingly, this has resulted in impressive earnings growth. However, as forecast in the latest analyst estimates, the company’s earnings growth is likely to slow. To learn more about the latest analyst forecast for the company, check out this analyst forecast visualization for the company.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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