Tennant (NYSE:TNC) has been doing well on the stock market, with its stock up a hefty 27% over the past three months. Since the market usually pays for a company's long-term fundamentals, we decided to investigate whether a company's key performance indicators are influencing the market. In particular, I would like to pay attention to the tenant's ROE today.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. More simply, it measures a company's profitability in relation to shareholder equity.
See our latest analysis for Tenants
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the tenant's ROE would be:
19% = USD 110 million ÷ USD 578 million (based on trailing twelve months to December 2023).
“Return” is the annual profit. That means for every $1 of shareholders' equity, the company generated $0.19 in profit for him.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
A side-by-side comparison of Tennant's revenue growth and ROE of 19%
At first glance, Tennant appears to have a decent ROE. His ROE for the company looks pretty good, especially when compared to the industry average of 13%. Perhaps as a result of this, Tennant has been able to achieve an impressive net income growth of 22% over the past five years. We believe that other factors may also be at play here. For example, the company's management may have made some good strategic decisions, or the company may have a low dividend payout ratio.
We then compared Tennant's net income growth rate to the industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 7.5%.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. Are markets pricing in the future prospects of multinational companies? Find out in our latest Intrinsic Value infographic research report.
Are tenants using their profits efficiently?
Tennant's median three-year payout ratio is 29%, which is a bit low. The company will hold the remaining 71%. This suggests that the company's dividend is well covered, and given the high growth discussed above, Tennant appears to be reinvesting its earnings efficiently.
Additionally, Tennant is determined to continue sharing profits with shareholders, as inferred by its long history of paying dividends for at least 10 years. According to existing analyst forecasts, the company's future dividend payout ratio is expected to drop to 18% in the next three years. Although the company's dividend payout ratio is expected to decline, some predict that Tennant's future ROE will decline to 14%. This suggests that there may be other factors causing the company's expected decline in his ROE.
summary
Overall, we are very satisfied with the tenant's performance. In particular, it's great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. Having said that, we researched the latest analyst forecasts and found that while the company's past earnings have grown, analysts expect future earnings to contract. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
