Advertisement
Australia markets open in 8 hours 28 minutes
  • ALL ORDS

    8,082.30
    -67.80 (-0.83%)
     
  • AUD/USD

    0.6695
    +0.0015 (+0.22%)
     
  • ASX 200

    7,814.40
    -66.90 (-0.85%)
     
  • OIL

    80.00
    +0.77 (+0.97%)
     
  • GOLD

    2,419.80
    +34.30 (+1.44%)
     
  • Bitcoin AUD

    99,815.07
    +173.38 (+0.17%)
     
  • CMC Crypto 200

    1,360.70
    -13.15 (-0.96%)
     

Tootsie Roll Industries, Inc.'s (NYSE:TR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 15% over the past three months, it is easy to disregard Tootsie Roll Industries (NYSE:TR). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Tootsie Roll Industries' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tootsie Roll Industries

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

ADVERTISEMENT

So, based on the above formula, the ROE for Tootsie Roll Industries is:

10% = US$80m ÷ US$785m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Tootsie Roll Industries' Earnings Growth And 10% ROE

To start with, Tootsie Roll Industries' ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 13% does temper our expectations. Additionally, the low net income growth of 2.5% seen by Tootsie Roll Industries over the past five years doesn't paint a very bright picture. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are keeping growth in earnings low. These include low earnings retention or poor capital allocation.

We then compared Tootsie Roll Industries' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.7% in the same 5-year period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Tootsie Roll Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tootsie Roll Industries Using Its Retained Earnings Effectively?

While Tootsie Roll Industries has a decent three-year median payout ratio of 37% (or a retention ratio of 63%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Tootsie Roll Industries has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

On the whole, we do feel that Tootsie Roll Industries has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth.

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.