Is Toromont Industries Ltd.'s(TSE:TIH) Recent Stock Performance Tethered To Its Strong Fundamentals?

Toromont Industries' (TSE:TIH) stock is up by a considerable 13% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Toromont Industries' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Toromont Industries

How Do You Calculate Return On Equity?

Return on equity 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 Toromont Industries is:

15% = CA$255m ÷ CA$1.7b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.15 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Toromont Industries' Earnings Growth And 15% ROE

To start with, Toromont Industries' ROE looks acceptable. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This probably laid the ground for Toromont Industries' moderate 15% net income growth seen over the past five years.

We then compared Toromont Industries' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 20% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Toromont Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Toromont Industries Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that Toromont Industries is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Toromont Industries is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. However, Toromont Industries' ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Toromont Industries' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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. 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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