It is hard to get excited after looking at Texas Instruments' (NASDAQ:TXN) recent performance, when its stock has declined 13% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Texas Instruments' ROE today.

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.

See our latest analysis for Texas Instruments

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Texas Instruments is:

48% = US$7.7b ÷ US$16b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.48 in profit.

Why Is ROE Important For Earnings Growth?

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

Texas Instruments' Earnings Growth And 48% ROE

Firstly, we acknowledge that Texas Instruments has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. Probably as a result of this, Texas Instruments was able to see a decent net income growth of 14% over the last 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.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is TXN worth today? The intrinsic value infographic in our free research report helps visualize whether TXN is currently mispriced by the market.

Is Texas Instruments Making Efficient Use Of Its Profits?

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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 62%. As a result, Texas Instruments' ROE is not expected to change by much either, which we inferred from the analyst estimate of 43% for future ROE.

Summary

Overall, we feel that Texas Instruments certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.