Can TGS ASA's (OB:TGS) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Most readers would already be aware that TGS' (OB:TGS) stock increased significantly by 13% 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 TGS' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for TGS

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for TGS is:

2.3% = US$47m ÷ US$2.1b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every NOK1 of its shareholder's investments, the company generates a profit of NOK0.02.

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. 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. 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.

TGS' Earnings Growth And 2.3% ROE

It is quite clear that TGS' ROE is rather low. Even compared to the average industry ROE of 9.2%, the company's ROE is quite dismal. However, the moderate 7.5% net income growth seen by TGS over the past five years is definitely a positive. We believe that there might 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 compared TGS' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 40% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about TGS''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TGS Efficiently Re-investing Its Profits?

The really high three-year median payout ratio of 115% for TGS suggests that the company is paying its shareholders more than what it is earning. Still the company's earnings have grown respectably. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates. Our risks dashboard should have the 4 risks we have identified for TGS.

Additionally, TGS 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 41% over the next three years. As a result, the expected drop in TGS' payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning TGS. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.