Do Its Financials Have Any Role To Play In Driving T.V. Today Network Limited's (NSE:TVTODAY) Stock Up Recently?

T.V. Today Network (NSE:TVTODAY) has had a great run on the share market with its stock up by a significant 20% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study T.V. Today Network's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for T.V. Today Network

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 T.V. Today Network is:

12% = ₹1.1b ÷ ₹9.0b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.12.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

T.V. Today Network's Earnings Growth And 12% ROE

At first glance, T.V. Today Network's ROE doesn't look very promising. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. Even so, T.V. Today Network has shown a fairly decent growth in its net income which grew at a rate of 8.9%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared T.V. Today Network's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is TVTODAY worth today? The intrinsic value infographic in our free research report helps visualize whether TVTODAY is currently mispriced by the market.

Is T.V. Today Network Using Its Retained Earnings Effectively?

In T.V. Today Network's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

Moreover, T.V. Today Network 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.

Summary

In total, it does look like T.V. Today Network has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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