Has Transmetro Corporation Limited (ASX:TCO) Stock's Recent Performance Got Anything to Do With Its Financial Health?

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

Sat, Mar 29, 2025, 6:36 PM 3 min read

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 Transmetro is:

10% = AU$2.6m ÷ AU$26m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.10.

Check out our latest analysis for Transmetro

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. 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. 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.

Transmetro's Earnings Growth And 10% ROE

When you first look at it, Transmetro's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.1%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Transmetro's net income grew significantly at a rate of 47% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Transmetro's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 41% in the same 5-year period.

past-earnings-growth — ASX:TCO Past Earnings Growth March 30th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Transmetro's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Transmetro Efficiently Re-investing Its Profits?

Transmetro's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and Transmetro is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Transmetro has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like Transmetro has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Transmetro.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.