Is Weakness In Tootsie Roll Industries, Inc. (NYSE:TR) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 2.3% over the past week, it is easy to disregard Tootsie Roll Industries (NYSE:TR). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Tootsie Roll Industries' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Tootsie Roll Industries
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tootsie Roll Industries is:
11% = US$94m ÷ US$834m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Tootsie Roll Industries' Earnings Growth And 11% ROE
To begin with, Tootsie Roll Industries seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Tootsie Roll Industries' moderate 8.9% net income growth seen over the past five years.
Next, on comparing Tootsie Roll Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10% over the last few years.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Tootsie Roll Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Tootsie Roll Industries Efficiently Re-investing Its Profits?
Tootsie Roll Industries has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Tootsie Roll Industries 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.
Conclusion
On the whole, we feel that Tootsie Roll Industries' 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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com