Trelleborg (STO:TREL B) stock is up 6.1% over the past three months. Since stock prices are generally aligned with a company’s financial performance over the long term, we decided to investigate whether the company’s decent financials had a role to play in the recent price movement. In this article, we decided to focus on Trelleborg’s ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Trelleborg
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Trelleborg is:
11% = 3.9 billion kr ÷ 35 billion kr (based on the last twelve months until June 2022).
The “return” is the annual profit. This therefore means that for every investment of 1 SEK by its shareholder, the company generates a profit of 0.11 SEK.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Trelleborg’s earnings growth and 11% ROE
At first glance, Trelleborg seems to have a decent ROE. Even so, compared to the industry average ROE of 19%, we are not very enthusiastic. Additionally, Trelleborg’s five-year net income growth of -0.02% is more or less stable. Not to mention that the company has a decent ROE to start with, just that it’s below the industry average. Therefore, other factors could be behind the steady revenue growth. These include poor revenue retention or poor capital allocation.
As a next step, we compared Trelleborg’s net income growth with the industry and found that the industry grew by an average of 6.7% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is TREL B worth today? The intrinsic value infographic in our free research report helps visualize whether TREL B is currently being mispriced by the market.
Does Trelleborg use its profits efficiently?
Despite a three-year normal median payout ratio of 44% (or a retention rate of 56%), Trelleborg has not experienced strong earnings growth. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, Trelleborg has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 41%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 9.7%.
Overall, we feel Trelleborg has positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. Moreover, the latest forecasts from industry analysts show that analysts expect the company’s earnings to continue to decline in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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.
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