Here’s why the 3i share price is climbing after the company’s latest earnings update

After the firm’s latest earnings report, the 3i share price reflects a company going from strength to strength, with the potential for more to come.

| More on:
Businesswoman calculating finances in an office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The 3i (LSE:III) share price is up 4% after the company’s half-year report on Thursday (14 November). And there’s a lot for investors to pay attention to.

Keeping up with the FTSE 100 private equity firm involves looking at a number of different metrics. And I thought these were generally positive in the latest update.

The headline return

As a private equity firm, the most important news for 3i is the performance of its investments. And the latest update reported a total return of 10% for the first half of the year.

That’s not bad at all. But investors thinking of buying the stock today to try and achieve that return should think carefully and be clear on the significance of that number.

The headline 10% is a return on shareholders’ funds from the start of the period. And that’s not the same as the market cap, which is around 1.5 times higher. 

That means 3i’s result represents a 6.3% return on an investment at today’s prices. That’s still more than respectable, but investors shouldn’t be distracted by the headline number.

Action

Around 75% of 3i’s private equity portfolio is its stake in Action – a European retailer. So investors thinking of buying the FTSE 100 stock had better keep a close eye on this business.

In the first 10 months of 2024, Action grew revenues 21% compared to 30% growth during the same period in 2023. And operating EBITDA grew 26%.

One company accounting for that much of a firm’s investment base can be a risk. If the business struggles, it’s likely to have a big effect on the firm’s overall returns.

It’s worth noting that 3i is looking for opportunities to make other investments. But these have been slow to materialise in recent years and the result is a heavily focused portfolio. 

Growth opportunities

Unlike other private equity firms, 3i invests its own capital from its balance sheet. Its aim is to deploy £750m per year into attractive opportunities.

The company hasn’t been able to hit this target for a good few years. But the latest update showed £888m in cash investments.

Most of this came from a big investment in Action. While this doesn’t diversify the portfolio, I think its encouraging that management is finding opportunities.

While investing at the wrong time is the worst thing it can do, sooner or later the company has to find uses for its cash to keep growing and generating higher returns. So I see this as encouraging.

Warren Buffett

Comparing 3i with Berkshire Hathaway is overly simplistic. But I think there are important similarities between the FTSE 100 firm and the way Warren Buffett does business.

Being patient when good opportunities are in short supply is key to the success of any investment firm. And I think 3i does this better than most.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »