Could Fundamentals Drive Momentum?

Most readers already know that Trade Desk (NASDAQ:TTD) stock has risen significantly by 41% over the past three months. Since stock prices are usually linked to a company's financial performance over the long term, we decided to take a closer look at its financial indicators to find out if they have played a role in the recent price movement. Specifically, we decided to examine Trade Desk's ROE in this article.

Return on equity or ROE is a test of how effectively a company increases its value and manages investors' money. In short, ROE shows the profit each dollar generates in terms of its shareholders' investments.

Check out our latest analysis for Trade Desk

Return on equity can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So based on the above formula, the ROE for Trade Desk is:

11% = $253M ÷ $2.4B (Based on trailing twelve months ending June 2024).

The “return” is the amount earned after taxes over the last twelve months. This means that for every $1 of equity, the company made $0.11 in profit.

So far we have learned that ROE measures how efficiently a company generates its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of ​​the company's growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.

First of all, Trade Desk's ROE looks acceptable. Still, we're not too excited compared to the average industry ROE of 13%. Additionally, Trade Desk's five-year net income growth is on the lower side at 3.1%. Keep in mind that the company has a respectable ROE. It's just that the industry ROE is higher. Therefore, there could be other factors keeping earnings growth low. These include low earnings retention or poor capital allocation.

As a next step, we compared Trade Desk's net income growth to the industry and were disappointed to find that the company's growth was below the industry average of 6.4% over the same period.

Earnings growth is an important factor in stock valuation. The investor should try to determine whether the expected growth or decline in earnings (as the case may be) is priced in. This way he can determine whether the stock's future looks promising or threatening. Is Trade Desk fairly valued compared to other companies? These 3 evaluation criteria could help you decide.

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