Is Technical Publications Service S.p.A.'s(BIT:TPS) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
November 24, 2020
BIT:TPS

Technical Publications Service's (BIT:TPS) stock is up by a considerable 5.5% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Technical Publications Service's ROE today.

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.

Check out our latest analysis for Technical Publications Service

How Is ROE Calculated?

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 Technical Publications Service is:

10% = €2.1m ÷ €20m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.10 in profit.

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. 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 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.

Technical Publications Service's Earnings Growth And 10% ROE

To start with, Technical Publications Service's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by Technical Publications Service.

Next, on comparing with the industry net income growth, we found that Technical Publications Service's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

past-earnings-growth
BIT:TPS Past Earnings Growth November 24th 2020

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Technical Publications Service's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Technical Publications Service Making Efficient Use Of Its Profits?

Technical Publications Service's three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

While Technical Publications Service has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we feel that Technical Publications Service's 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. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Technical Publications Service by visiting our risks dashboard for free on our platform here.

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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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