Could The Market Be Wrong About Truecaller AB (publ) (STO:TRUE B) Given Its Attractive Financial Prospects?

With its stock down 17% over the past three months, it is easy to disregard Truecaller (STO:TRUE B). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Truecaller's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

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 Truecaller is:

31% = kr493m ÷ kr1.6b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.31 in profit.

Check out our latest analysis for Truecaller

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Truecaller's Earnings Growth And 31% ROE

To begin with, Truecaller has a pretty high ROE which is interesting. Further, even comparing with the industry average if 28%, the company's ROE is quite respectable. Given the circumstances, the significant 30% net income growth seen by Truecaller over the last five years is not surprising.

We then performed a comparison between Truecaller's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 28% 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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for TRUE B? You can find out in our latest intrinsic value infographic research report.

Is Truecaller Making Efficient Use Of Its Profits?

The three-year median payout ratio for Truecaller is 27%, which is moderately low. The company is retaining the remaining 73%. So it seems that Truecaller is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Truecaller only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 23%. Regardless, the future ROE for Truecaller is predicted to rise to 40% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Truecaller's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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 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.