Will Weakness in The TJX Companies, Inc.'s (NYSE:TJX) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at TJX Companies' (NYSE:TJX) recent performance, when its stock has declined 4.4% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to TJX Companies' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for TJX Companies

How To Calculate Return On Equity?

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 TJX Companies is:

61% = US$4.8b ÷ US$7.8b (Based on the trailing twelve months to August 2024).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.61 in profit.

What Has ROE Got To Do With 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.

TJX Companies' Earnings Growth And 61% ROE

First thing first, we like that TJX Companies has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. As a result, TJX Companies' exceptional 20% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared TJX Companies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is TJX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is TJX Companies Using Its Retained Earnings Effectively?

TJX Companies' three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. By the looks of it, the dividend is well covered and TJX Companies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, TJX Companies is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. Accordingly, forecasts suggest that TJX Companies' future ROE will be 61% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with TJX Companies' 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. 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 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.