Stock Analysis
- United States
- /
- Metals and Mining
- /
- NYSE:TG
Tredegar Corporation's (NYSE:TG) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
It is hard to get excited after looking at Tredegar's (NYSE:TG) recent performance, when its stock has declined 14% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Tredegar's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Tredegar
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 Tredegar is:
26% = US$54m ÷ US$207m (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.26 in profit.
What Has ROE Got To Do With 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.
A Side By Side comparison of Tredegar's Earnings Growth And 26% ROE
First thing first, we like that Tredegar has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. Yet, Tredegar has posted measly growth of 2.4% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.
We then compared Tredegar's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 33% in the same period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tredegar is trading on a high P/E or a low P/E, relative to its industry.
Is Tredegar Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 28% (implying that the company retains the remaining 72% of its income), Tredegar's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Moreover, Tredegar has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
In total, it does look like Tredegar has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Tredegar by visiting our risks dashboard for free on our platform here.
What are the risks and opportunities for Tredegar?
Tredegar Corporation, through its subsidiaries, manufactures and sells aluminum extrusions, polyethylene (PE) films, and plastic and polyester films in the United States and internationally.
Rewards
Price-To-Earnings ratio (10.6x) is below the US market (14.6x)
Risks
Debt is not well covered by operating cash flow
High level of non-cash earnings
Profit margins (3%) are lower than last year (7%)
Further research on
Tredegar
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NYSE:TG
Tredegar
Tredegar Corporation, through its subsidiaries, manufactures and sells aluminum extrusions, polyethylene (PE) films, and plastic and polyester films in the United States and internationally.
Established dividend payer with mediocre balance sheet.
