Could The Market Be Wrong About Thomson Reuters Corporation (TSE:TRI) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Thomson Reuters' (TSE:TRI) recent performance, when its stock has declined 11% over the past three months. 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. Specifically, we decided to study Thomson Reuters' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Thomson Reuters

How Do You 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 Thomson Reuters is:

41% = US$5.7b ÷ US$14b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.41.

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. 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.

Thomson Reuters' Earnings Growth And 41% ROE

To begin with, Thomson Reuters has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. As a result, Thomson Reuters' exceptional 58% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Thomson Reuters' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is TRI fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Thomson Reuters Making Efficient Use Of Its Profits?

Thomson Reuters' three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Thomson Reuters is reinvesting its earnings efficiently.

Besides, Thomson Reuters has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. However, Thomson Reuters' future ROE is expected to decline to 13% despite there being not much change anticipated in the company's payout ratio.

Conclusion

On the whole, we feel that Thomson Reuters' 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 substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.