Is Weakness In TPC Consolidated Limited (ASX:TPC) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

TPC Consolidated (ASX:TPC) has had a rough three months with its share price down 7.7%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on TPC Consolidated's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for TPC Consolidated

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 TPC Consolidated is:

64% = AU$17m ÷ AU$27m (Based on the trailing twelve months to December 2022).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.64 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of TPC Consolidated's Earnings Growth And 64% ROE

First thing first, we like that TPC Consolidated has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. As a result, TPC Consolidated's exceptional 33% net income growth seen over the past five years, doesn't come as a surprise.

We then compared TPC Consolidated's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.6% in the same 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. If you're wondering about TPC Consolidated's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TPC Consolidated Efficiently Re-investing Its Profits?

TPC Consolidated has a three-year median payout ratio of 38% (where it is retaining 62% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and TPC Consolidated is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, TPC Consolidated has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with TPC Consolidated's performance. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for TPC Consolidated visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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