IDACORP's (NYSE:IDA) stock is up by 3.1% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to IDACORP's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You Calculate Return On Equity?

The formula for ROE is:

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 yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.

See our latest analysis for IDACORP

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

IDACORP's Earnings Growth And 8.7% ROE

When you first look at it, IDACORP's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.1%, so we won't completely dismiss the company. 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. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

As a next step, we compared IDACORP's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.4% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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?

The high three-year median payout ratio of 61% (that is, the company retains only 39% of its income) over the past three years for IDACORP suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, IDACORP has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 56%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 9.1%.

Summary

Overall, we would be extremely cautious before making any decision on IDACORP. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.