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IDACORP's (NYSE:IDA) stock is up by 3.1% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to IDACORP's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for IDACORP is:
8.7% = US$290m ÷ US$3.3b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.
See our latest analysis for IDACORP
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
IDACORP's Earnings Growth And 8.7% ROE
When you first look at it, IDACORP's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.1%, so we won't completely dismiss the company. We can see that IDACORP has grown at a five year net income growth average rate of 3.8%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.
As a next step, we compared IDACORP'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 5.4% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for IDA? You can find out in our latest intrinsic value infographic research report.