TriMas Corporation (NASDAQ:TRS) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?
TriMas (NASDAQ:TRS) has had a great run on the share market with its stock up by a significant 5.8% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to TriMas' 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.
See our latest analysis for TriMas
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for TriMas is:
7.6% = US$51m ÷ US$675m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
TriMas' Earnings Growth And 7.6% ROE
At first glance, TriMas' ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 18%. Therefore, TriMas' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared TriMas' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about TriMas''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is TriMas Efficiently Re-investing Its Profits?
TriMas' low three-year median payout ratio of 11%, (meaning the company retains89% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
Additionally, TriMas started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.
Summary
In total, we're a bit ambivalent about TriMas' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
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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.
