Teleflex Incorporated (NYSE: TFX) stock recently showed weakness, but the financial outlook looks correct: is the market wrong?

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Teleflex (NYSE: TFX) had a rough three-month period with its share price down 11%. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In particular, we will be paying close attention to Teleflex’s ROE today.

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. Simply put, it is used to assess a company’s profitability against its equity.

See our latest review for Teleflex

How do you calculate return on equity?

the formula for ROE is:

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

So, based on the above formula, Teleflex’s ROE is:

8.3% = US $ 280 million ÷ US $ 3.4 billion (based on the last twelve months to March 2021).

The “return” is the annual profit. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.08.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Teleflex 8.3% profit growth and ROE

When you first watch it, Teleflex’s ROE doesn’t look so appealing. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 11%. Teleflex has nonetheless recorded decent net profit growth of 14% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

We then performed a comparison between Teleflex’s net income growth with industry, which found that the company’s growth is similar to the industry’s average growth of 14% over the same period.

NYSE: TFX Past Profit Growth July 23, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. What is TFX worth today? The intrinsic value infographic in our free research report helps to visualize whether TFX is currently poorly valued by the market.

Is Teleflex Efficiently Using Its Retained Earnings?

Teleflex’s three-year median payout ratio to shareholders is 23% (implying that it retains 77% of its revenue), which is lower, so it looks like management is massively reinvesting profits to grow their business.

In addition, Teleflex 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. Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 8.6% over the next three years. As a result, the expected drop in Teleflex’s payout ratio explains the expected rise in the company’s future ROE to 15%, over the same period.

Conclusion

Overall, we believe Teleflex has positive attributes. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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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 material. Simply Wall St has no position in any of the stocks mentioned.
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