Technology One Limited's (ASX:TNE) Stock Been Rising: Are Strong Financials Guiding The Market?

editorial-team@simplywallst.com (Simply Wall St)

Sat, Apr 13, 2024, 6:31 PM 3 min read

Technology One's (ASX:TNE) stock up by 6.1% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Technology One's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Technology One

How Do You 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 Technology One is:

34% = AU$103m ÷ AU$306m (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.34 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Technology One's Earnings Growth And 34% ROE

Firstly, we acknowledge that Technology One has a significantly high ROE. Secondly, even when compared to the industry average of 9.5% the company's ROE is quite impressive. As a result, Technology One's exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Technology One's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.

past-earnings-growth — ASX:TNE Past Earnings Growth April 14th 2024

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Technology One's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Technology One Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for Technology One suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Technology One is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 56%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 33%.

Summary

In total, we are pretty happy with Technology One's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.