Could IDACORP, Inc.'s (NYSE:IDA) Weak Financials Mean That The Market Could Correct Its Share Price?

IDACORP's (NYSE:IDA) stock is up by 7.1% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Specifically, we decided to study IDACORP'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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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 IDACORP is:

8.7% = US$290m ÷ US$3.3b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.09 in profit.

View our latest analysis for IDACORP

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

IDACORP's Earnings Growth And 8.7% ROE

When you first look at it, IDACORP's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.1%. We can see that IDACORP has grown at a five year net income growth average rate of 3.8%, which is a bit on the lower side. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

We then compared IDACORP's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.4% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for IDA? You can find out in our latest intrinsic value infographic research report.

Is IDACORP Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 61% (or a retention ratio of 39%), most of IDACORP's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, IDACORP has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business 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 56%. As a result, IDACORP's ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.0% for future ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning IDACORP. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.