Tassal Group Limited's (ASX:TGR) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

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Tassal Group’s (ASX:TGR) stock up by 2.3% over the past month. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company’s financials don’t look very promising. Specifically, we decided to study Tassal Group’s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Tassal Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Tassal Group is:

5.2% = AU$43m ÷ AU$826m (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.05.

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. 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.

Tassal Group’s Earnings Growth And 5.2% ROE

When you first look at it, Tassal Group’s ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 8.1%, the company’s ROE leaves us feeling even less enthusiastic. Therefore, it might not be wrong to say that the five year net income decline of 3.7% seen by Tassal Group was probably the result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

However, when we compared Tassal Group’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 12% in the same period. This is quite worrisome.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tassal Group is trading on a high P/E or a low P/E, relative to its industry.

Is Tassal Group Using Its Retained Earnings Effectively?

Tassal Group has a high three-year median payout ratio of 55% (that is, it is retaining 45% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Tassal Group visit our risks dashboard for free.

Additionally, Tassal Group has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. However, Tassal Group’s ROE is predicted to rise to 9.5% despite there being no anticipated change in its payout ratio.

Summary

On the whole, Tassal Group’s performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it’s not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.