Tetra Tech (NASDAQ:TTEK) stock has increased by a significant 16% over the past three months. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In this article, we decided to focus on Tetra Tech's ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for Tetra Tech.
How do you calculate return on equity?
of Calculation formula for return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Tetra Tech's ROE is:
15% = USD 232 million ÷ USD 1.5 billion (based on trailing twelve months to December 2023).
“Earnings” is the amount of your after-tax earnings over the past 12 months. This means that for every $1 of shareholders' equity, the company generated $0.15 in profit.
Why is ROE important for profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
Tetra Tech's revenue growth and ROE 15%
At first glance, Tetra Tech appears to have a decent ROE. When compared to the industry average of his ROE of 9.2%, his ROE for the company looks quite remarkable. Perhaps as a result of this, Tetra Tech has been able to grow by a respectable 16% over the past five years.
We then compared Tetra Tech's net income growth rate to the industry. The same he is pleased to find that the company's growth rate is high when compared to the industry where in five years he recorded a growth rate of 9.8%.
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. What is TTEK worth today? The intrinsic value infographic in our free research report helps you visualize whether TTEK is currently mispriced in the market.
Is Tetra Tech reinvesting its profits efficiently?
Tetra Tech's median three-year payout ratio to shareholders is a modest 17% (meaning it retains 83% of its earnings), allowing management to use a large amount of profits to grow the business. It seems like they are reinvesting in.
Additionally, Tetra Tech is determined to continue sharing its profits with shareholders, as inferred by its long history of paying dividends for at least 10 years.
summary
Overall, we're pretty happy with Tetra Tech's performance. In particular, it's great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. That said, the latest analyst forecasts suggest that the company's revenue will continue to grow. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
