TREX S.A.'s (WSE:TRX) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

TREX (WSE:TRX) has had a great run on the share market with its stock up by a significant 14% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study TREX'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

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 TREX is:

11% = zł297k ÷ zł2.7m (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 PLN1 of its shareholder's investments, the company generates a profit of PLN0.11.

Check out our latest analysis for TREX

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of TREX's Earnings Growth And 11% ROE

At first glance, TREX's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 17%. As a result, TREX's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared TREX's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about TREX's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TREX Efficiently Re-investing Its Profits?

TREX doesn't pay any regular dividends, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

Overall, we have mixed feelings about TREX. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on TREX and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.