Does the weak fundamentals of Treasury Wine Estates Limited (ASX: TWE) mean that the stock could move in the opposite direction?
Most readers already know that Treasury Wine Estates (ASX: TWE) stock has risen 7.7% in the past three months. Given that markets typically pay for a company’s long-term financial health, we wonder if the current stock price momentum will hold up, given that the company’s financial data doesn’t look very promising. . Specifically, we have decided to study the ROE of Treasury Wine Estates in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for Treasury Wine Estates
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE for Treasury Wine Estates is:
7.0% = A $ 250 million Ã· A $ 3.6 billion (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. So this means that for every Australian dollar invested by its shareholder, the company generates a profit of 0.07 Australian dollar.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A Side-by-Side Comparison of Treasury Wine Estates’ 7.0% Profit Growth and ROE
When you first look at it, Treasury Wine Estates’ ROE doesn’t look so appealing. Still, further study shows that the company’s ROE is similar to the industry average of 6.9%. However, Treasury Wine Estates has seen steady growth in net income over the past five years, which doesn’t mean much. Keep in mind that the company’s ROE is not that high. Therefore, this provides some context for the stable earnings growth observed by the company.
Then, comparing with the industry’s net income growth, we found that the reported growth of Treasury Wine Estates was lower than the industry’s growth by 12% over the same period, which is not something we like to see.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Has the market taken into account TWE’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Are Treasury wineries making efficient use of their profits?
Treasury Wine Estates has a high three-year median payout rate of 71% (or retention rate of 29%), which means the company pays most of its profits as dividends to its shareholders. This partly explains why there has been no growth in its profits.
Additionally, Treasury Wine Estates pays dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if doing so at the expense of business growth. business. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 65% of its profits over the next three years. Regardless, the future ROE of Treasury Wine Estates should reach 12% despite the little change expected in its payout ratio.
Overall, we would be extremely careful before making a decision on Treasury Wine Estates. Because the company does not reinvest much in the business and given the low ROE, it is not surprising that there is no or no growth in its earnings. However, the latest analyst forecasts show that the company will continue to see its profits increase. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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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