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Most readers would already be aware that Tribune Resources' (ASX:TBR) stock increased significantly by 17% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Tribune Resources' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Tribune Resources is:
3.9% = AU$10m ÷ AU$257m (Based on the trailing twelve months to December 2019).
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$0.04.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Tribune Resources' Earnings Growth And 3.9% ROE
It is hard to argue that Tribune Resources' ROE is much good in and of itself. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. In spite of this, Tribune Resources was able to grow its net income considerably, at a rate of 23% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Tribune Resources' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 38% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tribune Resources is trading on a high P/E or a low P/E, relative to its industry.
Is Tribune Resources Making Efficient Use Of Its Profits?
The three-year median payout ratio for Tribune Resources is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Tribune Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Tribune Resources is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.
In total, it does look like Tribune Resources has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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. You can see the 2 risks we have identified for Tribune Resources by visiting our risks dashboard for free on our platform here.
This article by Simply Wall St is general in nature. 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.
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