July 23, 2024
Finance

Tourism Holdings Limited’s (NZSE:THL) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?


Tourism Holdings (NZSE:THL) has had a great run on the share market with its stock up by a significant 6.7% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don’t look very promising. In this article, we decided to focus on Tourism Holdings’ ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Tourism Holdings

How To Calculate Return On Equity?

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 Tourism Holdings is:

8.2% = NZ$50m ÷ NZ$611m (Based on the trailing twelve months to June 2023).

The ‘return’ is the yearly profit. So, this means that for every NZ$1 of its shareholder’s investments, the company generates a profit of NZ$0.08.

What Is The Relationship Between ROE And 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. 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 Tourism Holdings’ Earnings Growth And 8.2% ROE

On the face of it, Tourism Holdings’ ROE is not much to talk about. However, given that the company’s ROE is similar to the average industry ROE of 8.2%, we may spare it some thought. But then again, Tourism Holdings’ five year net income shrunk at a rate of 29%. Remember, the company’s ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 4.8% over the last few years, we found that Tourism Holdings’ performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth

NZSE:THL Past Earnings Growth December 23rd 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is THL fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Tourism Holdings Efficiently Re-investing Its Profits?

Tourism Holdings’ declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 57% (or a retention ratio of 43%). With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 3 risks we have identified for Tourism Holdings.

Moreover, Tourism Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Regardless, the future ROE for Tourism Holdings is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, Tourism Holdings’ performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.



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