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It is easy to overlook International Parkside Products' (CVE:IPD) given its unimpressive and roughly flat price performance over the past three months. We decided to study the company's financials, which appear to be inconsistent, to assess what this could mean for future share prices as markets tend to be aligned with a company's long-term fundamentals. Particularly, we will be paying attention to International Parkside Products' ROE today.
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.
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 International Parkside Products is:
3.2% = CA$14k ÷ CA$434k (Based on the trailing twelve months to January 2025).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.03 in profit.
Check out our latest analysis for International Parkside Products
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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 International Parkside Products' Earnings Growth And 3.2% ROE
It is hard to argue that International Parkside Products' ROE is much good in and of itself. Even compared to the average industry ROE of 16%, the company's ROE is quite dismal. Therefore, International Parkside Products' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 14% over the last few years.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 International Parkside Products is trading on a high P/E or a low P/E, relative to its industry.