Are Trajan Group Holdings Limited's (ASX:TRJ) Mixed Financials Driving The Negative Sentiment?

With its stock down 23% over the past three months, it is easy to disregard Trajan Group Holdings (ASX:TRJ). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Trajan Group Holdings' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Trajan Group Holdings

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 Trajan Group Holdings is:

1.5% = AU$1.9m ÷ AU$130m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Trajan Group Holdings' Earnings Growth And 1.5% ROE

As you can see, Trajan Group Holdings' ROE looks pretty weak. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. As a result, Trajan Group Holdings' flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Trajan Group Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 28% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Trajan Group Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Trajan Group Holdings Making Efficient Use Of Its Profits?

Trajan Group Holdings doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about Trajan Group Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.