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It is hard to get excited after looking at TreeHouse Foods' (NYSE:THS) recent performance, when its stock has declined 23% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study TreeHouse Foods' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for TreeHouse Foods is:
1.7% = US$27m ÷ US$1.5b (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.02 in profit.
See our latest analysis for TreeHouse Foods
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
TreeHouse Foods' Earnings Growth And 1.7% ROE
As you can see, TreeHouse Foods' ROE looks pretty weak. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. Despite this, surprisingly, TreeHouse Foods saw an exceptional 38% net income growth over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that TreeHouse Foods' growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is TreeHouse Foods fairly valued compared to other companies? These 3 valuation measures might help you decide.