Texas Instruments (NASDAQ:TXN) has had a great run on the share market with its stock up by a significant 11% over the last three months.   We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes.      In this article, we decided to focus on Texas Instruments'  ROE.  

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested.  In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

ROE 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 Texas Instruments is:

35% = US$5.9b ÷ US$17b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months.  So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.35.

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.  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 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.

A Side By Side comparison of Texas Instruments' Earnings Growth And 35% ROE

First thing first, we like that Texas Instruments has an impressive ROE.   Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us.   This likely paved the way for the modest 9.2% net income growth seen by Texas Instruments over the past five years.    

We then compared Texas Instruments' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 31% in the same 5-year period, which is a bit concerning.  

NasdaqGS:TXN Past Earnings Growth June 28th 2024

Earnings growth is a huge factor in stock valuation.  What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price.  By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await.    One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Texas Instruments is trading on a high P/E or a low P/E, relative to its industry.  

Is Texas Instruments Using Its Retained Earnings Effectively?  

The high three-year median payout ratio of 53% (or a retention ratio of 47%) for Texas Instruments suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.    

Besides, Texas Instruments has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.      Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 71% over the next three years.   However, the company's ROE is not expected to change by much despite the higher expected payout ratio.    

Conclusion  

In total, it does look like Texas Instruments has some positive aspects to its business.      Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings.       We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate.     To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.