Could The Market Be Wrong About Infratil Limited (NZSE:IFT) Given Its Attractive Financial Prospects?

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editorial-team@simplywallst.com (Simply Wall St)

Thu, May 30, 2024, 12:33 PM 4 min read

Infratil (NZSE:IFT) has had a rough week with its share price down 4.4%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Infratil's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Infratil

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Infratil is:

11% = NZ$846m ÷ NZ$7.5b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.11 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Infratil's Earnings Growth And 11% ROE

To begin with, Infratil seems to have a respectable ROE. Especially when compared to the industry average of 8.4% the company's ROE looks pretty impressive. Probably as a result of this, Infratil was able to see an impressive net income growth of 75% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Infratil's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 16% in the same 5-year period.

past-earnings-growth — NZSE:IFT Past Earnings Growth May 30th 2024

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One 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 prospects. So, you may want to check if Infratil is trading on a high P/E or a low P/E, relative to its industry.

Is Infratil Efficiently Re-investing Its Profits?

Infratil's three-year median payout ratio to shareholders is 13%, which is quite low. This implies that the company is retaining 87% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, Infratil has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 32% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 5.2% over the same period.

Conclusion

Overall, we are quite pleased with Infratil's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.