TalkMed Group Limited (SGX:5G3) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

TalkMed Group (SGX:5G3) has had a great run on the share market with its stock up by a significant 20% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study TalkMed 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for TalkMed Group

How Do You 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 TalkMed Group is:

34% = S$25m ÷ S$76m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.34 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 TalkMed Group's Earnings Growth And 34% ROE

First thing first, we like that TalkMed Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.0% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for TalkMed Group in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital

We then compared TalkMed Group's net income growth with the industry and found that the average industry growth rate was 5.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about TalkMed Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TalkMed Group Making Efficient Use Of Its Profits?

TalkMed Group has a very high three-year median payout ratio of 103% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. This does go some way in explaining the negligible earnings growth seen by TalkMed Group. Paying a dividend beyond their means is usually not viable over the long term. This is quite a risky position to be in. To know the 2 risks we have identified for TalkMed Group visit our risks dashboard for free.

In addition, TalkMed Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about TalkMed Group. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into TalkMed Group's past profit growth, check out this visualization 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.