Is Texas Roadhouse, Inc.'s (NASDAQ:TXRH) Latest Stock Performance A Reflection Of Its Financial Health?
Texas Roadhouse (NASDAQ:TXRH) has had a great run on the share market with its stock up by a significant 24% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Texas Roadhouse'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Texas Roadhouse
How Do You 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 Texas Roadhouse is:
27% = US$314m ÷ US$1.2b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.
Why Is ROE Important For 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.
Texas Roadhouse's Earnings Growth And 27% ROE
First thing first, we like that Texas Roadhouse has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. So, the substantial 21% net income growth seen by Texas Roadhouse over the past five years isn't overly surprising.
As a next step, we compared Texas Roadhouse's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 22% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Texas Roadhouse fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Texas Roadhouse Using Its Retained Earnings Effectively?
Texas Roadhouse's three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. So it seems that Texas Roadhouse is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Besides, Texas Roadhouse has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 30%.
Conclusion
Overall, we are quite pleased with Texas Roadhouse'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
