Is Texas Instruments Incorporated's (NASDAQ:TXN) Latest Stock Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
March 26, 2021
NasdaqGS:TXN

Most readers would already be aware that Texas Instruments' (NASDAQ:TXN) stock increased significantly by 10% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Texas Instruments' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Texas Instruments

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 Texas Instruments is:

61% = US$5.6b ÷ US$9.2b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.61.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Texas Instruments' Earnings Growth And 61% ROE

To begin with, Texas Instruments has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. This probably laid the groundwork for Texas Instruments' moderate 12% net income growth seen over the past five years.

We then performed a comparison between Texas Instruments' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.

past-earnings-growth
NasdaqGS:TXN Past Earnings Growth March 26th 2021

Earnings growth is a huge factor in stock valuation. 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. Is Texas Instruments fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Texas Instruments Making Efficient Use Of Its Profits?

Texas Instruments has a significant three-year median payout ratio of 56%, meaning that it is left with only 44% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Texas Instruments 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 60% of its profits over the next three years. As a result, Texas Instruments' ROE is not expected to change by much either, which we inferred from the analyst estimate of 71% for future ROE.

Summary

Overall, we are quite pleased with Texas Instruments' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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This article by Simply Wall St is general in nature. 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.
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