Tredegar Corporation (NYSE: TG) shares slipped but fundamentals look correct: will the market correct the share price in the future?

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With its stock down 2.6% in the past three months, it’s easy to overlook Tredegar (NYSE: TG). But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we decided to study the ROE of Tredegar in this article.

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

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, Tredegar’s ROE is:

14% = US $ 20 million ÷ US $ 143 million (based on the last twelve months to June 2021).

The “return” is the annual profit. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.14 in profit.

Why is ROE important for profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Tredegar profit growth and 14% ROE

At first glance, Tredegar appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 14%. However, while Tredegar has a fairly respectable ROE, its five-year rate of decline in net income was 6.4%. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

However, when we compared Tredegar’s growth to that of the industry, we found that although the company’s profits declined, the industry saw profit growth of 3.3% over the course of the same period. It is quite worrying.

NYSE: TG Past Profit Growth October 13, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you’re wondering about Tredegar’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Tredegar Efficiently Reinvesting Its Profits?

Despite a normal three-year median payout rate of 42% (i.e. 58% retention rate), the fact that Tredegar’s revenue has declined is quite baffling. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.

Additionally, Tredegar has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. .

Summary

Overall, we think Tredegar certainly has some positive factors to consider. However, given the high ROE and high earnings retention, we would expect the company to show strong earnings growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. Our risk dashboard would contain the 2 risks we have identified for Tredegar.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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