Declining Stock and Decent Financials: Is The Market Wrong About Ingersoll Rand Inc. (NYSE:IR)?

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Ingersoll Rand (NYSE:IR) has had a rough three months with its share price down 20%. 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. In this article, we decided to focus on Ingersoll Rand’s ROE.

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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Ingersoll Rand

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 Ingersoll Rand is:

5.8% = US$523m ÷ US$9.1b (Based on the trailing twelve months to December 2021).

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 $0.06 in profit.

What Is The Relationship Between ROE And 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 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.

Ingersoll Rand’s Earnings Growth And 5.8% ROE

At first glance, Ingersoll Rand’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 13% either. In spite of this, Ingersoll Rand was able to grow its net income considerably, at a rate of 33% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Ingersoll Rand’s growth is quite high when compared to the industry average growth of 9.7% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is IR fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Ingersoll Rand Efficiently Re-investing Its Profits?

Ingersoll Rand has a really low three-year median payout ratio of 1.6%, meaning that it has the remaining 98% left over to reinvest into its business. So it looks like Ingersoll Rand is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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 1.9%. Regardless, the future ROE for Ingersoll Rand is predicted to rise to 11% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that Ingersoll Rand has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.