Trifast plc (LON: TRI) The stock is doing well but the fundamentals look uncertain: what lies ahead?


Trifast (LON: TRI) has had an excellent performance in the equity market with a significant increase in its share of 13% over the past week. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will pay particular attention to Trifast’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.

See our latest review for Trifast

How is the ROE calculated?

The return on equity formula is:

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

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

4.4% = £ 5.8million £ 132million (based on the last twelve months to March 2021).

“Return” refers to a company’s profits over the past year. So this means that for every £ 1 invested by its shareholder, the company generates a profit of £ 0.04.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. 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. 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.

A side-by-side comparison of Trifast’s profit growth and 4.4% ROE

At first glance, Trifast’s ROE isn’t much to say. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 11% below the industry average. Therefore, it might not be wrong to say that the 26% five-year drop in net income seen by Trifast was likely the result of lower ROE. We believe there could be other factors at play here as well. Such as – low profit retention or misallocation of capital.

However, when we compared Trifast’s growth with that of the industry, we found that although the company’s profits declined, the industry saw profit growth of 6.4% over the past year. same period. It is quite worrying.

LSE: TRI Past Profit Growth September 25, 2021

Profit growth is a huge factor in the valuation of stocks. 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 waiting for them. 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 Trifast is trading high P / E or low P / E, relative to its industry.

Is Trifast effectively reinvesting its profits?

Despite a normal three-year median payout ratio of 37% (where it keeps 63% of its profits), Trifast has seen its profits decline as we saw above. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

Additionally, Trifast has paid dividends over a nine-year period, which means the management of the company is instead focused on sustaining its dividend payments, regardless of declining profits. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 25% over the next three years. The fact that the company’s ROE is expected to increase to 8.7% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we have mixed feelings about Trifast. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. 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. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 does not have any position in the mentioned stocks.
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About Geraldine Higgins

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