IPG Photonics Corporation (NASDAQ:IPGP) Stock Is Doing Well: Does Financials Matter?

IPG Photonics (NASDAQ:IPGP) has had a strong run in the stock market with a significant 5.3% rise in its shares over the past month. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of IPG Photonics in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for IPG Photonics

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for IPG Photonics is:

10% = $267 million ÷ $2.6 billion (based on trailing 12 months to June 2022).

The “return” is the annual profit. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.10.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of IPG Photonics’ earnings growth and 10% ROE

For starters, IPG Photonics seems to have a respectable ROE. Still, the fact that the company’s ROE is below the industry average of 13% tempers our expectations. Additionally, IPG Photonics’ net income has declined by 13% over the past five years. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, the decline in earnings could be the result of other factors. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

That being said, we compared the performance of IPG Photonics with that of the industry and were concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 17 % over the same period.

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is IPG Photonics correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Is IPG Photonics using its profits effectively?

IPG Photonics pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other explanations for this. For example, the company’s business may deteriorate.

Conclusion

Overall, we think IPG Photonics certainly has some positives to consider. However, although the company has a decent ROE and high earnings retention, its earnings growth figure is quite disappointing. This suggests that there could be an external threat to the business, which is hampering growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.