ITV plc (LON:ITV) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
ITV's stock has decreased by 1.3% in the last week, but we shouldn't overlook it just yet. The company's financials are strong in the long term, especially their ROE, which we will focus on today.
Return on Equity (ROE) measures how well a company is increasing its worth and handling the funds of its investors. In simpler terms, it shows how successful the company is at earning profits from shareholder investments.
Check out our most recent examination of ITV
Calculating Return On Equity
The equation to determine return on equity is:
Return on Equity is a financial calculation that measures the profitability of a company by dividing its net profit from continuing operations by the amount of shareholders' equity.
Therefore, according to the formula mentioned earlier, the Return on Equity for ITV is:
22% equals £426 million divided by £1.9 billion (calculated based on the previous twelve months up to June 2024).
The 'return' refers to the annual earnings. In other words, for every £1 that shareholders invest in the company, it generates a profit of £0.22.
How Does ROE Affect Earnings Growth?
Up to now, we've discovered that ROE shows how profitable a company is. By looking at how much of its profits a company reinvests or keeps, we can predict how well it will do in the future. If all other factors stay the same, a company with a higher ROE and profit retention will likely grow faster than ones that don't have these qualities.
ITV's Earnings Growth Vs. 22% ROE
First off, ITV has a fairly impressive Return on Equity (ROE) which catches our attention. Furthermore, the company's ROE exceeds the industry average of 11%, which is quite notable. However, the 4.4% decrease in net income reported by ITV is concerning to us. We believe there may be other reasons at play that are hindering the company's progress. These factors could include low profits retained or ineffective capital allocation.
But after analyzing ITV's progress compared to the overall industry, we discovered that even though the company's profits have been decreasing, the industry as a whole has experienced a 24% increase in earnings during that same timeframe. This is definitely a cause for concern.
The foundation for determining a company's worth largely comes from how much it is making in profits. Investors must then figure out if the predicted profit growth, or lack thereof, is already reflected in the stock price. This will show whether the company's future looks positive or negative. If you're curious about ITV's value, take a look at its price-to-earnings ratio compared to others in its industry.
Is ITV's Profit Usage Efficient?
ITV consistently gives back 57% of its profits to shareholders over the past three years, leaving only 43% for reinvestment. This may explain why earnings are decreasing, as the company has limited capital to grow. Find out more about the risks we see for ITV on our free risks dashboard.
Furthermore, ITV has consistently issued dividends for at least a decade, showing that the company is committed to distributing dividends regardless of earnings growth. After analyzing the most recent consensus data from analysts, it has been projected that ITV will continue to pay out around 51% of its profits over the next three years. Predictions indicate that ITV's future Return on Equity (ROE) will remain at 20%, similar to its current ROE.
In general, we believe that ITV has some positive aspects to consider. However, the slow growth in earnings is a bit worrying, especially considering the company's high return rate. Investors could have seen more benefits from the high ROE if the company had reinvested more of its earnings. As mentioned earlier, the company is only retaining a small portion of its profits. Additionally, after examining current analyst predictions, it appears that the company's earnings are expected to continue shrinking in the future. For more information on the company's future earnings growth forecasts, check out this free report on analyst forecasts for ITV.
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This blog post from Simply Wall St is meant to be informative and is based on past data and forecasts from analysts. We use a fair and neutral approach in our writing, and our articles are not meant to give financial advice. They do not suggest buying or selling any stocks, and do not consider your goals or financial status. Our goal is to offer in-depth analysis focusing on fundamental data for the long term. Please be aware that our analysis may not include the most recent company news or other qualitative information. Simply Wall St does not have any investments in the companies mentioned.
