As most readers should already be aware, Tracsis (LON:TRCS) stock is up a substantial 9.9% over the past month. But the company’s key financial indicators appear to be diverging across the board, and that leaves us questioning whether or not the company’s current share price momentum can be sustained. Specifically, we decided to examine Tracsis’ ROE in this article.
ROE, or return on equity, is a useful tool for assessing how effectively a company is generating returns on the investment received from its shareholders. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.
Check out our latest analysis for Tracsis
How do you calculate return on equity?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Tracsis is:
4.0% = £2.4m ÷ £59m (based on trailing 12 months to January 2022).
The “return” is the annual profit. This means that for every £1 worth of equity, the company makes £0.04 profit.
Why is ROE important for 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 is reinvesting or “keeping” for future growth, which will then give us an idea of the company’s growth potential. Assuming all else being equal, companies that exhibit both higher return on equity and higher earnings retention tend to be those that exhibit a higher growth rate than companies that do not share the same characteristics.
A head-to-head comparison of Tracsis’ earnings growth and 4.0% ROE
At first glance, there’s not much to say about Tracsis’ ROE. We then compared the company’s ROE to the industry as a whole and were disappointed to find that the ROE is below the industry average of 7.5%. For that reason, Tracsis’ five-year net income decline of 14% isn’t surprising given its lower ROE. We believe there may be other issues negatively impacting the company’s earnings prospects. Such as – low earnings retention or poor capital allocation.
As a next step, we compared Tracsis’ performance to the industry and were disappointed to find that the industry increased earnings by 9.1% over the same period while the company shrunk earnings.
Earnings growth is an important 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). That way they have an idea if the stock is headed into clear blue waters or if swampy waters await them. Is TRCS fairly rated? This company intrinsic value infographic has everything you need to know.
Does Tracsis reinvest its profits efficiently?
When we add up Tracsis’ low three-year median payout ratio of 7.3% (with 93% of earnings retained) calculated for the most recent three-year period, we’re puzzled by the lack of growth. This shouldn’t normally be the case when a company keeps most of its profits. So there could be other factors at play here that could potentially hamper growth. For example, the business has faced some headwinds.
Additionally, Tracsis has been paying dividends for at least a decade, suggesting that management must have recognized that shareholders prefer dividends to earnings growth. Based on the latest analyst estimates, we have found that the company’s future payout ratio is likely to remain steady at 7.9% for the next three years.
Overall, we have mixed feelings about Tracsis. While it appears to be retaining most of its earnings, given its low ROE, investors may not benefit from all that reinvestment after all. The low earnings growth suggests our theory is correct. With this in mind, we examined the latest analyst forecasts and found that while the company has a history of shrinking earnings, analysts expect its earnings to rise going forward. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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