Wide gap and high returns support the NASDAQ valuation: INMD of InMode Ltd.
This article first appeared on Simply Wall St News.
InMode (NASDAQ: INMD) is having a breakthrough year. After a parabolic acceleration, the market begins to question its valuation. Yet the company continues to innovate and create value without even going into debt.
See our latest review for InMode.
After a big ramp-up, InMode opted for a 2: 1 stock split. While not a necessity in the days of fractional ownership, stock splits are still seen as bullish signs. From the announcement, stocks jumped 2% pre-market.
Meanwhile, the company launched EvolveX – a body contouring system. Chief physician Spero Theodorou called it a revolutionary non-invasive body contouring system, praising the ability to adjust procedures for each patient in real time. InMode is successful because it hit gold halfway. Find the demographic that wants results comparable to plastic surgery, but without the full surgical procedure.
According to Grand View Research, the market for non-invasive cosmetic treatments is expected to grow at a compound annual growth rate of 13.9% from 2021 to 2028.
ROE or return on equity is a valuable tool to assess how effectively a company can generate the returns on investment it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for InMode is:
39% = US $ 128 million ÷ US $ 331 million (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.39 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we can assess a company’s future ability to generate profits.
Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of the business compared to businesses that don’t necessarily have these characteristics.
InMode profit growth and 39% ROE
For starters, InMode has a pretty high ROE, which is interesting. Second, a comparison with the industry-reported average ROE of 11% also does not go unnoticed.
So the substantial 55% net income growth seen by InMode over the past five years is not too surprising.
We then compared InMode’s net income growth with the industry, and we are delighted to see that the company’s growth figure is higher than that of the industry, which has a growth rate of 14%. during the same period.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings is taken into account, whatever the case may be. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about InMode’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is InMode using its profits effectively?
InMode does not pay any dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the high number of profit growth discussed above.
InMode currently exhibits many traits of a high quality business:
Impeccable balance sheet
High insider ownership
In particular, it’s great to see the company investing heavily in their business, with a high rate of return.
While no company can dominate the market forever, as competitors end up driving down margins, InMode has patents and a highly skilled management team to maintain pole position in this market.
Still, the company’s earnings growth is expected to slow, as the current analyst predicts. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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