With its stock down 16% over the past three months, it is easy to disregard Three's Company Media Group (SHSE:605168). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Three's Company Media Group's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

Return on equity 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 Three's Company Media Group is:

28% = CN¥754m ÷ CN¥2.7b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.28 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Three's Company Media Group's Earnings Growth And 28% ROE

To begin with, Three's Company Media Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 6.1% which is quite remarkable. As a result, Three's Company Media Group's exceptional 33% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Three's Company Media Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.6% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Three's Company Media Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Three's Company Media Group Using Its Retained Earnings Effectively?

Three's Company Media Group's three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. By the looks of it, the dividend is well covered and Three's Company Media Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Three's Company Media Group has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Three's Company Media Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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 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.