Stock Analysis

Is Tractor Supply Company's (NASDAQ:TSCO) Recent Stock Performance Tethered To Its Strong Fundamentals?

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NasdaqGS:TSCO
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Most readers would already be aware that Tractor Supply's (NASDAQ:TSCO) stock increased significantly by 18% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Tractor Supply's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out the opportunities and risks within the US Specialty Retail industry.

How Is ROE Calculated?

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 Tractor Supply is:

54% = US$1.0b ÷ US$1.9b (Based on the trailing twelve months to September 2022).

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 $0.54 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. 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.

Tractor Supply's Earnings Growth And 54% ROE

To begin with, Tractor Supply has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 29% also doesn't go unnoticed by us. This likely paved the way for the modest 20% net income growth seen by Tractor Supply over the past five years. growth

As a next step, we compared Tractor Supply'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 30% in the same period.

past-earnings-growth
NasdaqGS:TSCO Past Earnings Growth November 29th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is TSCO worth today? The intrinsic value infographic in our free research report helps visualize whether TSCO is currently mispriced by the market.

Is Tractor Supply Using Its Retained Earnings Effectively?

Tractor Supply's three-year median payout ratio to shareholders is 25% (implying that it retains 75% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Tractor Supply has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 41% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Tractor Supply's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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