The recent performance of Tecan Group Ltd. (VTX: TECN) being driven by its attractive financial outlook?

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Tecan Group (VTX: TECN) has had a strong run in the equity market with a significant increase in its shares of 10% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of Tecan Group.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Tecan Group

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of Tecan Group is:

14% = CHF 104 million ÷ CHF 734 million (based on the last twelve months up to December 2020).

The “return” is the profit of the last twelve months. Another way to look at this is that for every CHF1 worth of equity, the company was able to earn CHF 0.14 in profit.

What is the relationship between ROE and 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 is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

A side-by-side comparison of Tecan Group’s 14% profit growth and ROE

For starters, Tecan Group’s ROE seems acceptable. Even compared to the industry average of 15%, the company’s ROE looks pretty decent. This certainly adds context to the moderate 11% net profit growth of the Tecan Group observed over the past five years.

Then, comparing Tecan Group’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 14% over the same period.

SWX: TECN Past Profit Growth July 9, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you are wondering about Tecan Group’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Does the Tecan Group use its profits efficiently?

Tecan Group has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention rate of 65%) and a respectable amount of earnings growth as we have seen above, which means that the company has made efficient use of its profits.

In addition, Tecan Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 28% of its profits over the next three years. As a result, Tecan Group’s ROE is not expected to change much either, which we have deduced from analysts’ estimate of 13% for future ROE.

summary

Overall, we think Tecan Group’s performance has been quite good. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course enabled the company to experience substantial growth in profits. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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This Simply Wall St article is general in nature. 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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