Tasty's (LON:TAST) stock was mostly flat over the past week. Regardless, it's worth giving the company a closer given that its key financial performance indicators look pretty strong and that's usually rewarded by the markets in the long-run. Particularly, we will be paying attention to Tasty'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Tasty
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tasty is:
74% = UK£1.3m ÷ UK£1.7m (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.74 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Tasty's Earnings Growth And 74% ROE
First thing first, we like that Tasty has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 8.7% which is quite remarkable. So, the substantial 25% net income growth seen by Tasty over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Tasty compares quite favourably to the industry average, which shows a decline of 3.5% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Tasty fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Tasty Efficiently Re-investing Its Profits?
Given that Tasty doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
On the whole, we feel that Tasty'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 sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Tasty visit our risks dashboard for free.
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.
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Its Easy to Overlook Tasty plc (LON:TAST) But Its Strong Financial Prospects Might Make You Want To Stop and Notice - Yahoo Finance
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