Techtronic Industries Company Limited (HKG:669) shares fell, but fundamentals look solid: is the market wrong?
Techtronic Industries (HKG:669) had a difficult month with a 6.2% drop in its share price. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In particular, we’ll be paying attention to Techtronic Industries’ ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Techtronic Industries
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Techtronic Industries is:
23% = US$1.2 billion ÷ US$5.0 billion (based on trailing 12 months to June 2022).
The “return” is the annual profit. One way to conceptualize this is that for every HK$1 of share capital it has, the company has made a profit of HK$0.23.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
Techtronic Industries earnings growth and ROE of 23%
First, we recognize that Techtronic Industries has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 6.9%, which is quite remarkable. So the substantial net income growth of 21% seen by Techtronic Industries over the past five years is not too surprising.
We then compared Techtronic Industries net income growth with the industry and we are happy to see that the company growth figure is higher than the industry which has a growth rate of 9.9 % over the same period.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is the 669 correctly valued? This intrinsic business value infographic has everything you need to know.
Does Techtronic Industries effectively reinvest its profits?
Techtronic Industries has a three-year median payout ratio of 40% (where it keeps 60% of its revenue), which is neither too low nor too high. So it looks like Techtronic Industries is effectively reinvesting to see impressive earnings growth (discussed above) and paying out a well-covered dividend.
Additionally, Techtronic Industries is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 37% of its earnings over the next three years. As a result, Techtronic Industries’ ROE is not expected to change much either, which we infer from analysts’ estimate of 23% for future ROE.
All in all, we are quite satisfied with the performance of Techtronic Industries. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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