Is AS Tallinna Vesi's (TAL:TVEAT) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that AS Tallinna Vesi's (TAL:TVEAT) stock increased by 8.4% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to AS Tallinna Vesi's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for AS Tallinna Vesi

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for AS Tallinna Vesi is:

15% = €17m ÷ €112m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.15 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

AS Tallinna Vesi's Earnings Growth And 15% ROE

To begin with, AS Tallinna Vesi seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.1%. This probably laid the ground for AS Tallinna Vesi's moderate 5.6% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that AS Tallinna Vesi's reported growth was lower than the industry growth of 7.9% in the same period, which is not something we like to see.

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. Has the market priced in the future outlook for TVEAT? You can find out in our latest intrinsic value infographic research report

Is AS Tallinna Vesi Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for AS Tallinna Vesi suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, AS Tallinna Vesi has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like AS Tallinna Vesi has some positive aspects to its business. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Up till now, we've only made a short study of the company's growth data. You can do your own research on AS Tallinna Vesi and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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