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It is hard to get excited after looking at Irish Continental Group's (LON:ICGC) recent performance, when its stock has declined 4.4% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Irish Continental Group's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Irish Continental Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Irish Continental Group is:
22% = €62m ÷ €280m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.22 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Irish Continental Group's Earnings Growth And 22% ROE
First thing first, we like that Irish Continental Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. This probably laid the groundwork for Irish Continental Group's moderate 18% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Irish Continental Group's reported growth was lower than the industry growth of 43% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for ICGC? You can find out in our latest intrinsic value infographic research report.