Tarjar Xairo SOCIMI, S.A.'s (BME:YTAR) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Tarjar Xairo SOCIMI's (BME:YTAR) stock increased significantly by 49% 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. In this article, we decided to focus on Tarjar Xairo SOCIMI's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Tarjar Xairo SOCIMI

How To 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 Tarjar Xairo SOCIMI is:

9.0% = €466k ÷ €5.2m (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 €1 worth of equity, the company was able to earn €0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Tarjar Xairo SOCIMI's Earnings Growth And 9.0% ROE

At first glance, Tarjar Xairo SOCIMI's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.8% doesn't go unnoticed by us. Especially when you consider Tarjar Xairo SOCIMI's exceptional 31% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Tarjar Xairo SOCIMI's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.9%.

Earnings growth is a huge factor in stock valuation. 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 Tarjar Xairo SOCIMI fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tarjar Xairo SOCIMI Efficiently Re-investing Its Profits?

Tarjar Xairo SOCIMI's three-year median payout ratio is a pretty moderate 49%, meaning the company retains 51% of its income. By the looks of it, the dividend is well covered and Tarjar Xairo SOCIMI is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Summary

Overall, we are quite pleased with Tarjar Xairo SOCIMI's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 5 risks we have identified for Tarjar Xairo SOCIMI.

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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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