Tribune Resources Limited's (ASX:TBR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Tribune Resources (ASX:TBR) has had a rough three months with its share price down 19%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Tribune Resources' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Tribune Resources

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tribune Resources is:

18% = AU$48m ÷ AU$265m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.18 in profit.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Tribune Resources' Earnings Growth And 18% ROE

At first glance, Tribune Resources seems to have a decent ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. This certainly adds some context to Tribune Resources' decent 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Tribune Resources' reported growth was lower than the industry growth of 32% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Tribune Resources''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tribune Resources Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Tribune Resources is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Tribune Resources is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

On the whole, we feel that Tribune Resources' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 3 risks we have identified for Tribune Resources.

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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. 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.
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