Tracsis plc (LON:TRCS) is doing well but fundamentals look mixed: is there a clear direction for the stock?
Most readers already know that Tracsis (LON:TRCS) stock is up a significant 12% over the past week. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on the ROE of Tracsis.
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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Tracsis
How do you calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Tracsis is:
4.2% = £2.4m ÷ £57m (based on trailing 12 months to July 2021).
“Yield” is the income the business has earned over the past year. Thus, this means that for every £1 of investment by its shareholder, the company generates a profit of £0.04.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Tracsis earnings growth and ROE of 4.2%
When you first look at it, Tracsis’ ROE doesn’t look that appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 9.0%. Given the circumstances, the significant decline in net income of 7.6% experienced by Tracsis over the past five years is not surprising. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout ratio or faces competitive pressures.
So, as a next step, we benchmarked Tracsis’ performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 13% in during the same period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Tracsis is trading on a high P/E or a low P/E, relative to its industry.
Does Tracsis effectively reinvest its profits?
Although the company has paid a portion of its dividend in the past, it currently does not pay any dividend. This implies that potentially all of its profits are reinvested in the business.
All in all, we’re a bit ambivalent about Tracsis’ performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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.