Most readers would already be aware that TFF Group’s (EPA:TFF) stock increased significantly by 15% over the past month. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. Specifically, we decided to study TFF Group’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
ROE 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 TFF Group is:
7.6% = €27m ÷ €358m (Based on the trailing twelve months to October 2019).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.08 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. 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. 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.
TFF Group’s Earnings Growth And 7.6% ROE
On the face of it, TFF Group’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 12% either. Therefore, TFF Group’s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by2.8% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is TFF worth today? The intrinsic value infographic in our free research report helps visualize whether TFF is currently mispriced by the market.
Is TFF Group Making Efficient Use Of Its Profits?
TFF Group’s low three-year median payout ratio of 14% (implying that the company keeps86% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that’s not the case.
Additionally, TFF Group 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 21% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change by much.
Overall, we have mixed feelings about TFF Group. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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