Can Mixed Fundamentals Have A Negative Impact on Telecom Plus PLC (LON:TEP) Current Share Price Momentum?
Most readers would already be aware that Telecom Plus' (LON:TEP) stock increased significantly by 10% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Telecom Plus' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Telecom Plus
How Do You 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 Telecom Plus is:
17% = UK£37m ÷ UK£216m (Based on the trailing twelve months to September 2020).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.17.
What Has ROE Got To Do With 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. 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 Telecom Plus' Earnings Growth And 17% ROE
At first glance, Telecom Plus seems to have a decent ROE. Especially when compared to the industry average of 9.0% the company's ROE looks pretty impressive. Yet, Telecom Plus has posted measly growth of 4.5% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Telecom Plus' reported growth was lower than the industry growth of 8.0% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for TEP? You can find out in our latest intrinsic value infographic research report.
Is Telecom Plus Efficiently Re-investing Its Profits?
Telecom Plus' very high three-year median payout ratio of 125% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. That's a huge risk in our books.
Moreover, Telecom Plus 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 105% of its profits over the next three years.
Conclusion
Overall, we have mixed feelings about Telecom Plus. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Telecom Plus' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
This article by Simply Wall St is general in nature. 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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