After reading Inspired Energy PLC’s (LON:INSE) most recent earnings announcement (31 December 2017), I found it useful to look back at how the company has performed in the past and compare this against the latest numbers. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is a crucial aspect. Below is a brief commentary on my key takeaways.
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How Did INSE’s Recent Performance Stack Up Against Its Past?
INSE’s trailing twelve-month earnings (from 31 December 2017) of UK£2.53m has declined by -25.56% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 31.26%, indicating the rate at which INSE is growing has slowed down. What could be happening here? Well, let’s take a look at what’s transpiring with margins and if the rest of the industry is facing the same headwind.
Revenue growth over the past couple of years, has been positive, however, earnings growth has failed to keep up meaning Inspired Energy has been ramping up its expenses by a lot more. This hurts margins and earnings, and is not a sustainable practice. Looking at growth from a sector-level, the UK commercial services industry has been relatively flat in terms of earnings growth in the past year, evening out from a robust 17.54% over the past half a decade. This growth is a median of profitable companies of 19 Commercial Services companies in GB including AssetCo, Rentokil Initial and Premier Technical Services Group. This means that any near-term headwind the industry is experiencing, it’s hitting Inspired Energy harder than its peers.
In terms of returns from investment, Inspired Energy has fallen short of achieving a 20% return on equity (ROE), recording 10.08% instead. However, its return on assets (ROA) of 5.95% exceeds the GB Commercial Services industry of 5.24%, indicating Inspired Energy has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for Inspired Energy’s debt level, has declined over the past 3 years from 53.73% to 10.18%.
What does this mean?
Though Inspired Energy’s past data is helpful, it is only one aspect of my investment thesis. Companies that are profitable, but have capricious earnings, can have many factors influencing its business. I suggest you continue to research Inspired Energy to get a better picture of the stock by looking at: