Are Strong Financial Prospects The Force That Is Driving The Momentum In Texas Roadhouse, Inc.'s NASDAQ:TXRH) Stock?

Texas Roadhouse (NASDAQ:TXRH) has had a great run on the share market with its stock up by a significant 11% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Texas Roadhouse'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 Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Texas Roadhouse is:

32% = US$444m ÷ US$1.4b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.32 in profit.

See our latest analysis for Texas Roadhouse

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Texas Roadhouse's Earnings Growth And 32% ROE

First thing first, we like that Texas Roadhouse has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. So, the substantial 28% net income growth seen by Texas Roadhouse over the past five years isn't overly surprising.

As a next step, we compared Texas Roadhouse'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 37% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Texas Roadhouse's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Texas Roadhouse Making Efficient Use Of Its Profits?

Texas Roadhouse has a three-year median payout ratio of 46% (where it is retaining 54% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Texas Roadhouse is reinvesting its earnings efficiently.

Additionally, Texas Roadhouse 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. As a result, Texas Roadhouse's ROE is not expected to change by much either, which we inferred from the analyst estimate of 30% for future ROE.

Conclusion

In total, we are pretty happy with Texas Roadhouse'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 respectable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.