Yahoo Finance Thomson Reuters Corporation's (TSE:TRI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Thomson Reuters' (TSE:TRI) stock is up by a considerable 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Thomson Reuters' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Thomson Reuters
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Thomson Reuters is:
22% = US$2.4b ÷ US$11b (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.22 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Thomson Reuters' Earnings Growth And 22% ROE
To begin with, Thomson Reuters seems to have a respectable ROE. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This probably laid the ground for Thomson Reuters' moderate 10% net income growth seen over the past five years.
We then performed a comparison between Thomson Reuters' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Thomson Reuters fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Thomson Reuters Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 41% (implying that the company retains 59% of its profits), it seems that Thomson Reuters is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Additionally, Thomson Reuters 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 52% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 17% over the same period.
Conclusion
On the whole, we feel that Thomson Reuters' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
