Trigano S.A.'s (EPA:TRI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Trigano's (EPA:TRI) stock increased significantly by 17% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Trigano's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Trigano

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 Trigano is:

21% = €367m ÷ €1.8b (Based on the trailing twelve months to February 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.21.

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 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.

Trigano's Earnings Growth And 21% ROE

To begin with, Trigano seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This probably laid the ground for Trigano's moderate 17% net income growth seen over the past five years.

We then performed a comparison between Trigano's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 19% in the same 5-year period.

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

Is Trigano Making Efficient Use Of Its Profits?

Trigano's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Trigano 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 22%. Regardless, Trigano's ROE is speculated to decline to 14% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Trigano'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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.