Is The Interpublic Group of Companies, Inc.'s (NYSE:IPG) Latest Stock Performance A Reflection Of Its Financial Health?

Simply Wall St · 01/29 11:03

Most readers would already be aware that Interpublic Group of Companies' (NYSE:IPG) stock increased significantly by 18% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Interpublic Group of Companies' ROE today.

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.

Check out our latest analysis for Interpublic Group of Companies

How Do You Calculate Return On Equity?

Return on equity 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 Interpublic Group of Companies is:

25% = US\$952m ÷ US\$3.8b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each \$1 of shareholders' capital it has, the company made \$0.25 in profit.

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.

Interpublic Group of Companies' Earnings Growth And 25% ROE

To begin with, Interpublic Group of Companies has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.9% also doesn't go unnoticed by us. Probably as a result of this, Interpublic Group of Companies was able to see a decent net income growth of 13% over the last five years.

Next, on comparing Interpublic Group of Companies' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

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. What is IPG worth today? The intrinsic value infographic in our free research report helps visualize whether IPG is currently mispriced by the market.

Is Interpublic Group of Companies Efficiently Re-investing Its Profits?

Interpublic Group of Companies has a significant three-year median payout ratio of 50%, meaning that it is left with only 50% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Interpublic Group of Companies 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 44%. As a result, Interpublic Group of Companies' ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.

Conclusion

In total, we are pretty happy with Interpublic Group of Companies' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.