Is TE Connectivity Ltd.'s (NYSE:TEL) Recent Performance Tethered To Its Attractive Financial Prospects?

TE Connectivity's (NYSE:TEL) stock up by 8.2% 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. In this article, we decided to focus on TE Connectivity's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for TE Connectivity

How Is ROE Calculated?

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 TE Connectivity is:

27% = US$3.4b ÷ US$13b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

TE Connectivity's Earnings Growth And 27% ROE

Firstly, we acknowledge that TE Connectivity has a significantly high ROE. Secondly, even when compared to the industry average of 9.6% the company's ROE is quite impressive. This likely paved the way for the modest 13% net income growth seen by TE Connectivity over the past five years.

Next, on comparing TE Connectivity's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TEL fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is TE Connectivity Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that TE Connectivity is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, TE Connectivity has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 28% of its profits over the next three years. Regardless, TE Connectivity's ROE is speculated to decline to 20% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with TE Connectivity'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 sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com