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Will Telekom Austria Aktiengesellschaft (VIE:TKA) Continue To Underperform Its Industry?

Telekom Austria Aktiengesellschaft (WBAG:TKA) delivered a less impressive 11.70% ROE over the past year, compared to the 13.25% return generated by its industry. Though TKA’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on TKA’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of TKA’s returns. Check out our latest analysis for Telekom Austria

Breaking down Return on Equity

Return on Equity (ROE) weighs Telekom Austria’s profit against the level of its shareholders’ equity. An ROE of 11.70% implies €0.12 returned on every €1 invested. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Telekom Austria’s equity capital deployed. Its cost of equity is 8.18%. Some of Telekom Austria’s peers may have a higher ROE but its cost of equity could exceed this return, leading to an unsustainable negative discrepancy i.e. the company spends more than it earns. This is not the case for Telekom Austria which is reassuring. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

WBAG:TKA Last Perf May 11th 18
WBAG:TKA Last Perf May 11th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Telekom Austria can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt Telekom Austria currently has. At 123.94%, Telekom Austria’s debt-to-equity ratio appears balanced and indicates its ROE is generated from its capacity to increase profit without a large debt burden.

WBAG:TKA Historical Debt May 11th 18
WBAG:TKA Historical Debt May 11th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. While Telekom Austria exhibits a weak ROE against its peers, its returns are sufficient enough to cover its cost of equity. Its appropriate level of leverage means investors can be more confident in the sustainability of Telekom Austria’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For Telekom Austria, there are three pertinent aspects you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Telekom Austria worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Telekom Austria is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Telekom Austria? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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