TPC Consolidated Limited's (ASX:TPC) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

By
Simply Wall St
Published
January 20, 2021
ASX:TPC

Most readers would already be aware that TPC Consolidated's (ASX:TPC) stock increased significantly by 24% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study TPC Consolidated's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for TPC Consolidated

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for TPC Consolidated is:

38% = AU$3.4m ÷ AU$8.9m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.38 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of TPC Consolidated's Earnings Growth And 38% ROE

To begin with, TPC Consolidated has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.4% which is quite remarkable. Under the circumstances, TPC Consolidated's considerable five year net income growth of 69% was to be expected.

Next, on comparing with the industry net income growth, we found that TPC Consolidated's growth is quite high when compared to the industry average growth of 8.1% in the same period, which is great to see.

past-earnings-growth
ASX:TPC Past Earnings Growth January 21st 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is TPC Consolidated fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TPC Consolidated Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we are quite pleased with TPC Consolidated's performance. 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 substantial 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for TPC Consolidated.

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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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