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It is hard to get excited after looking at IDEX's (NYSE:IEX) recent performance, when its stock has declined 19% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on IDEX's ROE.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for IDEX
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for IDEX is:
13% = US$505m ÷ US$3.8b (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.
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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
IDEX's Earnings Growth And 13% ROE
At first glance, IDEX seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 13%. This probably goes some way in explaining IDEX's moderate 8.9% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that IDEX's reported growth was lower than the industry growth of 17% over the last few years, which is not something we like to see.
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. Is IEX fairly valued? This infographic on the company's intrinsic value has everything you need to know.