Is the recent stock performance of Teledyne Technologies Incorporated (NYSE:TDY) influenced in any way by its financials?

By William S. Archambault Last updated Mar 6, 2022

Most readers will already know that Teledyne Technologies (NYSE:TDY) stock is up 8.2% over the past three months. Since stock prices are generally aligned with a company’s financial performance over the long term, we decided to investigate whether the company’s decent financials had a role to play in the recent price movement. In this article, we decided to focus on the ROE of Teledyne Technologies.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Teledyne Technologies

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE of Teledyne Technologies is:

5.8% = $445 million ÷ $7.6 billion (based on trailing 12 months to January 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.06.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Teledyne Technologies earnings growth and ROE of 5.8%

At first glance, Teledyne Technologies’ ROE doesn’t look that appealing. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 14%. However, we can see that Teledyne Technologies has experienced modest net profit growth of 16% over the past five years. We believe there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.

We then performed a comparison of Teledyne Technologies’ net income growth with the industry, which revealed that the company’s growth is similar to the industry average growth of 16% over the same period.

NYSE: TDY Past Earnings Growth March 6, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. What is TDY worth today? The intrinsic value infographic in our free research report helps visualize whether TDY is currently being mispriced by the market.

Does Teledyne Technologies use its profits effectively?

Teledyne Technologies currently pays no dividends, which essentially means that it has reinvested all of its earnings back into the company. This certainly contributes to the decent number of earnings growth we discussed above.

Conclusion

All in all, it seems that Teledyne Technologies has some positive aspects of its business. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.