Does Tinexta S.p.A.'s (BIT:TNXT) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Tinexta's (BIT:TNXT) stock increased significantly by 61% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Tinexta'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 Tinexta is:

5.5% = €25m ÷ €461m (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.05 in profit.

View our latest analysis for Tinexta

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Tinexta's Earnings Growth And 5.5% ROE

On the face of it, Tinexta's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.3% either. Given the circumstances, the significant decline in net income by 11% seen by Tinexta over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Tinexta's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is TNXT worth today? The intrinsic value infographic in our free research report helps visualize whether TNXT is currently mispriced by the market.

Is Tinexta Making Efficient Use Of Its Profits?

Tinexta has a high three-year median payout ratio of 77% (that is, it is retaining 23% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 4 risks we have identified for Tinexta visit our risks dashboard for free.

Additionally, Tinexta has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 30% over the next three years. As a result, the expected drop in Tinexta's payout ratio explains the anticipated rise in the company's future ROE to 11%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Tinexta. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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.