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Declining Stock and Decent Financials: Is The Market Wrong About Informa plc (LON:INF)?

It is hard to get excited after looking at Informa's (LON:INF) recent performance, when its stock has declined 16% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Informa's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Informa

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Informa is:

4.2% = UK£246m ÷ UK£5.8b (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Informa's Earnings Growth And 4.2% ROE

At first glance, Informa's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.0%. Despite this, surprisingly, Informa saw an exceptional 30% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Informa's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is INF fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Informa Making Efficient Use Of Its Profits?

Informa has a significant three-year median payout ratio of 81%, meaning the company only retains 19% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Our latest analyst data shows that the future payout ratio of the company is expected to drop to 52% over the next three years. As a result, the expected drop in Informa's payout ratio explains the anticipated rise in the company's future ROE to 8.7%, over the same period.

Summary

In total, it does look like Informa has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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