Yahoo Finance Is Weakness In Finning International Inc. (TSE:FTT) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
Finning International (TSE:FTT) has had a rough month with its share price down 7.9%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Finning International's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Finning International
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Finning International is:
23% = CA$565m ÷ CA$2.4b (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.23.
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. 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.
Finning International's Earnings Growth And 23% ROE
Firstly, we acknowledge that Finning International has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. As a result, Finning International's exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Finning International's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 29% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is FTT fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Finning International Making Efficient Use Of Its Profits?
The three-year median payout ratio for Finning International is 38%, which is moderately low. The company is retaining the remaining 62%. By the looks of it, the dividend is well covered and Finning International is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Finning International has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
On the whole, we feel that Finning International's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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.
