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IDACORP's (NYSE:IDA) stock up by 3.7% over the past month. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study IDACORP's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for IDACORP
How Do You Calculate Return On Equity?
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 IDACORP is:
9.4% = US$251m ÷ US$2.7b (Based on the trailing twelve months to September 2021).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.09 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. 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 9.4% ROE
When you first look at it, IDACORP's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.5%, we may spare it some thought. Having said that, IDACORP has shown a meagre net income growth of 4.6% over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.
Next, on comparing IDACORP's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.2% 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. If you're wondering about IDACORP's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.