Is Teqnion AB (publ) (STO:TEQ)’s latest stock market performance a reflection of its financial health?

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Teqnion (STO:TEQ) stock is up 12% over the past week. 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 outcomes. In this article, we decided to focus on Teqnion’s ROE.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Teqnion

How do you calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Teqnion is:

27% = 100 million kr ÷ 366 million kr (based on the last twelve months to March 2022).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 SEK worth of equity, the company was able to make a profit of 0.27 SEK.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Teqnion’s earnings growth and 27% ROE

First of all, we love that Teqnion has an impressive ROE. Second, a comparison with the average industry-reported ROE of 22% is also not lost on us. Under these circumstances, a considerable growth in Teqnion’s five-year net profit of 42% was to be expected.

Then, comparing with the industry net income growth, we found that Teqnion’s growth is quite high compared to the industry average growth of 17% over the same period, which is great have.

OM:TEQ Past Earnings Growth June 28, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A 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 outlook. So, you might want to check if Teqnion is trading on a high P/E or a low P/E, relative to its industry.

Does Teqnion effectively reinvest its profits?

Teqnion’s three-year median payout ratio to shareholders is 9.1%, which is quite low. This implies that the company retains 91% of its profits. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.

Conclusion

Overall, we feel Teqnion’s performance has been quite good. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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