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With its stock down 6.0% over the past week, it is easy to disregard TKH Group (AMS:TWEKA). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to TKH Group's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for TKH Group
How Is ROE Calculated?
ROE 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 TKH Group is:
20% = €166m ÷ €836m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.20 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
TKH Group's Earnings Growth And 20% ROE
To start with, TKH Group's ROE looks acceptable. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This probably laid the ground for TKH Group's moderate 20% net income growth seen over the past five years.
As a next step, we compared TKH Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.
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 TWEKA fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is TKH Group Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 49% (implying that the company retains 51% of its profits), it seems that TKH Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.