Is Tennant Company's (NYSE:TNC) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Tennant (NYSE:TNC) has had a great run on the share market with its stock up by a significant 27% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Tennant's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Tennant
How To Calculate Return On Equity?
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 Tennant is:
19% = US$110m ÷ US$578m (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.19 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 Tennant's Earnings Growth And 19% ROE
At first glance, Tennant seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Probably as a result of this, Tennant was able to see an impressive net income growth of 22% over the last five years. We reckon that there could also be other factors at play here. 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 compared Tennant's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.5% in the same 5-year 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for TNC? You can find out in our latest intrinsic value infographic research report.
Is Tennant Making Efficient Use Of Its Profits?
The three-year median payout ratio for Tennant is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Tennant is reinvesting its earnings efficiently.
Moreover, Tennant 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 18% over the next three years. Still forecasts suggest that Tennant's future ROE will drop to 14% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.
Summary
Overall, we are quite pleased with Tennant's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
