Is TECOM Group PJSC's (DFM:TECOM) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that TECOM Group PJSC's (DFM:TECOM) stock increased by 1.9% over the past week. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study TECOM Group PJSC's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for TECOM Group PJSC

How Is ROE Calculated?

ROE 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 TECOM Group PJSC is:

14% = د.إ854m ÷ د.إ6.1b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.14.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

TECOM Group PJSC's Earnings Growth And 14% ROE

It is hard to argue that TECOM Group PJSC's ROE is much good in and of itself. However, the fact that it is higher than the industry average of 6.7% makes us a bit more interested. And more so given that TECOM Group PJSC has grown its net income at an acceptable rate of 9.5%. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between TECOM Group PJSC's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.0% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TECOM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is TECOM Group PJSC Making Efficient Use Of Its Profits?

TECOM Group PJSC has a very high three-year median payout ratio of 959,137,770% suggesting that the company's shareholders are getting paid from more than just the company's earnings. However, this hasn't really hampered its ability to grow as we saw earlier. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates. Our risks dashboard should have the 2 risks we have identified for TECOM Group PJSC.

Along with seeing a growth in earnings, TECOM Group PJSC only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 77% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

On the whole, we do feel that TECOM Group PJSC has some positive attributes. Especially the growth in earnings which was backed by a moderate ROE. Still, the ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.