Thomson Reuters Corporation's (TSE:TRI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Thomson Reuters (TSE:TRI) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Thomson Reuters' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Thomson Reuters
How Is ROE Calculated?
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 Thomson Reuters is:
12% = US$1.5b ÷ US$12b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.12 in profit.
Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Thomson Reuters' Earnings Growth And 12% ROE
To begin with, Thomson Reuters seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 16% does temper our expectations. That being the case, the significant five-year 35% net income growth reported by Thomson Reuters comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
As a next step, we compared Thomson Reuters' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 24%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Thomson Reuters''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Thomson Reuters Making Efficient Use Of Its Profits?
Thomson Reuters' three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. So it seems that Thomson Reuters is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Besides, Thomson Reuters has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Still, forecasts suggest that Thomson Reuters' future ROE will rise to 20% even though the the company's payout ratio is not expected to change by much.
On the whole, we feel that Thomson Reuters' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
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