Toromont Industries Ltd.'s (TSE:TIH) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
Toromont Industries (TSE:TIH) has had a rough three months with its share price down 7.1%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Toromont Industries' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Toromont Industries
How Is ROE Calculated?
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 Toromont Industries is:
18% = CA$371m ÷ CA$2.1b (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.18 in profit.
What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Toromont Industries' Earnings Growth And 18% ROE
To start with, Toromont Industries' ROE looks acceptable. Even when compared to the industry average of 21% the company's ROE looks quite decent. This certainly adds some context to Toromont Industries' moderate 13% net income growth seen over the past five years.
As a next step, we compared Toromont Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 24% in the same period.
Earnings growth is a huge factor in stock valuation. 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. What is TIH worth today? The intrinsic value infographic in our free research report helps visualize whether TIH is currently mispriced by the market.
Is Toromont Industries Using Its Retained Earnings Effectively?
Toromont Industries has a three-year median payout ratio of 34%, which implies that it retains the remaining 66% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Additionally, Toromont Industries 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
On the whole, we feel that Toromont Industries' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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.
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