TC Unterhaltungselektronik AG's (FRA:TCU) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
October 17, 2021
Source: Shutterstock

TC Unterhaltungselektronik's (FRA:TCU) stock is up by a considerable 32% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to TC Unterhaltungselektronik's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for TC Unterhaltungselektronik

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for TC Unterhaltungselektronik is:

47% = €138k ÷ €291k (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.47 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of TC Unterhaltungselektronik's Earnings Growth And 47% ROE

To begin with, TC Unterhaltungselektronik has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. As a result, TC Unterhaltungselektronik's exceptional 29% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared TC Unterhaltungselektronik's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

DB:TCU Past Earnings Growth October 18th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about TC Unterhaltungselektronik's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TC Unterhaltungselektronik Using Its Retained Earnings Effectively?

TC Unterhaltungselektronik doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we feel that TC Unterhaltungselektronik's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboardwould have the 3 risks we have identified for TC Unterhaltungselektronik.

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