Texas Pacific Land (NYSE:TPL) had a tough month with its stock price down 9.0%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study Texas Pacific Land’s ROE in this article.
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 Texas Pacific Land
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Texas Pacific Land is:
44% = $318 million ÷ $728 million (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.44.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Texas Pacific Land earnings growth and 44% ROE
First, we recognize that Texas Pacific Land has a significantly high ROE. Second, even compared to the industry average of 18%, the company’s ROE is quite impressive. This likely laid the foundation for Texas Pacific Land’s moderate 18% net income growth seen over the past five years.
Given that the industry has been shrinking profits at a rate of 7.0% over the same period, the company’s net profit growth is quite impressive.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Has the market priced in TPL’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does Texas Pacific Land Use Its Profits Effectively?
With a three-year median payout ratio of 27% (implying the company retains 73% of its earnings), it appears that Texas Pacific Land is effectively reinvesting to see respectable earnings growth and paying a dividend that is well covered.
Additionally, Texas Pacific Land has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 18% over the next three years.
Overall, we’re quite pleased with Texas Pacific Land’s performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.