Are Strong Financial Prospects The Force That Is Driving The Momentum In Tetra Tech, Inc.'s NASDAQ:TTEK) Stock?
Tetra Tech's (NASDAQ:TTEK) stock is up by a considerable 21% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Tetra Tech's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Tetra Tech
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 Tetra Tech is:
22% = US$301m ÷ US$1.4b (Based on the trailing twelve months to April 2023).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.22 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. 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 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.
Tetra Tech's Earnings Growth And 22% ROE
First thing first, we like that Tetra Tech has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. This likely paved the way for the modest 17% net income growth seen by Tetra Tech over the past five years.
Next, on comparing with the industry net income growth, we found that Tetra Tech's growth is quite high when compared to the industry average growth of 9.9% 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. 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 Tetra Tech is trading on a high P/E or a low P/E, relative to its industry.
Is Tetra Tech Making Efficient Use Of Its Profits?
Tetra Tech's three-year median payout ratio to shareholders is 17% (implying that it retains 83% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Tetra Tech has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 18%. Accordingly, forecasts suggest that Tetra Tech's future ROE will be 20% which is again, similar to the current ROE.
Conclusion
In total, we are pretty happy with Tetra Tech's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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