Profit ratio

Is the market rewarding Image Scan Holdings Plc (LON:IGE) with negative sentiment due to its mixed fundamentals?

Image Scan Holdings (LON:IGE) had a tough three months with its share price down 37%. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In particular, we’ll be paying attention to Image Scan Holdings’ ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Image Scan Holdings

How is ROE calculated?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Image Scan Holdings is:

7.3% = UK£96,000 ÷ UK£1.3 million (based on the last twelve months to March 2022).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every pound invested by its shareholder, the company generates a profit of 0.07 pounds.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Image Scan Holdings 7.3% earnings growth and ROE

At first glance, Image Scan Holdings’ ROE doesn’t have much to say. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 14%. Therefore, it may not be wrong to say that the 25% decline in net income over five years observed by Image Scan Holdings was likely the result of lower ROE. However, there could also be other factors leading to lower income. For example, the company has a very high payout rate or faces competitive pressures.

So, in the next step, we compared the performance of Image Scan Holdings to that of the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate 0.1% over the same period.

OBJECTIVE: IGE Past Earnings Growth May 22, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Image Scan Holdings, check out this indicator of its price-earnings ratio, relative to its sector.

Does Image Scan Holdings effectively reinvest its profits?

Since Image Scan Holdings pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering there’s no earnings growth to show. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Summary

All in all, we are a bit ambivalent about Image Scan Holdings’ performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.