TKH Group (AMS: TWEKA) has performed well in the equity market with a significant increase in its share of 12% over the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. More precisely, we decided to study the ROE of TKH Group in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest analysis for TKH Group
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for TKH Group is:
9.4% = 61 million euros ÷ 649 million euros (based on the last twelve months up to June 2021).
The “return” is the profit of the last twelve months. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.09 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
9.4% profit growth and ROE of TKH Group
For starters, TKH Group seems to have a respectable ROE. Yet the fact that the company’s ROE is 14% below the industry average tempers our expectations. In addition, TKH Group’s net income has decreased by 9.9% over the past five years. Remember, the business has a high ROE to start with, just lower than the industry average. Therefore, there might be other aspects that lead to lower income. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
That being said, we compared the performance of TKH Group with that of the industry and became concerned when we found that although the company reduced its profits, the industry increased its profits at a rate of. 9.2% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Has the market taken into account TWEKA’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Does TKH Group use its profits efficiently?
The decline in TKH Group’s profits is not surprising given that the company spends most of its profits on paying dividends, judging by its three-year median payout rate of 76% (or a retention rate of 24%). The company has only a small reserve of capital to reinvest – a vicious cycle that does not benefit the company in the long run. You can see the 2 risks that we have identified for TKH Group by visiting our risk dashboard for free on our platform here.
Additionally, TKH Group has paid dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of company growth. business. Estimates from existing analysts suggest the company’s future payout ratio is expected to drop to 51% over the next three years. Thus, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 12% over the same period.
All in all, we are a little ambivalent about the performance of TKH Group. Specifically, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return. Investors could have benefited if the company had reinvested more of its profits. As previously stated, the company retains a small portion of its profits. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.