Will Weakness in TKH Group N.V.'s (AMS:TWEKA) Stock Prove Temporary Given Strong Fundamentals?

TKH Group (AMS:TWEKA) has had a rough three months with its share price down 8.1%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study TKH Group's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for TKH Group

How To Calculate Return On Equity?

Return on equity 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 TKH Group is:

14% = €117m ÷ €827m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.14 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of TKH Group's Earnings Growth And 14% ROE

To begin with, TKH Group seems to have a respectable ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 22% seen over the past five years by TKH Group. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between TKH Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about TKH Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TKH Group Efficiently Re-investing Its Profits?

The three-year median payout ratio for TKH Group is 49%, which is moderately low. The company is retaining the remaining 51%. So it seems that TKH Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, TKH Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 40%. As a result, TKH Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

Overall, we are quite pleased with TKH Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.