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Is Temple & Webster Group Ltd's (ASX:TPW) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Temple & Webster Group (ASX:TPW) has had a great run on the share market with its stock up by a significant 82% over the last 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 Temple & Webster Group's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Temple & Webster Group

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 Temple & Webster Group is:

46% = AU$14m ÷ AU$30m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.46 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Temple & Webster Group's Earnings Growth And 46% ROE

First thing first, we like that Temple & Webster Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.8% which is quite remarkable. As a result, Temple & Webster Group's exceptional 64% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Temple & Webster Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 61% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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 Temple & Webster Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Temple & Webster Group Efficiently Re-investing Its Profits?

Given that Temple & Webster Group 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

In total, we are pretty happy with Temple & Webster Group's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. 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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