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Is Travel Technology Interactive’s (EPA:ALTTI) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 45% over the past three months, it is easy to disregard Travel Technology Interactive (EPA:ALTTI). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Particularly, we will be paying attention to Travel Technology Interactive’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Travel Technology Interactive

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 Travel Technology Interactive is:

3.3% = €175k ÷ €5.3m (Based on the trailing twelve months to June 2021).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Travel Technology Interactive’s Earnings Growth And 3.3% ROE

At first glance, Travel Technology Interactive’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 12% either. Given the circumstances, the significant decline in net income by 14% seen by Travel Technology Interactive over the last five years is not surprising. We recognize that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Travel Technology Interactive’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 15% in the same period.

ENXTPA:ALTTI Past Earnings Growth March 7th 2022

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. 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 Travel Technology Interactive is trading on a high P/E or a low P/E, relative to its industry.

Is Travel Technology Interactive Efficiently Re-investing Its Profits?

Travel Technology Interactive doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about Travel Technology Interactive. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory is correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 5 risks we have identified for Travel Technology Interactive visit our risks dashboard for free.

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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