Is Telstra Group Limited's (ASX:TLS) Recent Price Movement Underpinned By Its Weak Fundamentals?

Telstra Group (ASX:TLS) has had a rough month with its share price down 3.2%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Telstra Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Telstra Group is:

14% = AU$2.3b ÷ AU$16b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.14.

See our latest analysis for Telstra Group

What Is The Relationship Between ROE And Earnings Growth?

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

Telstra Group's Earnings Growth And 14% ROE

At first glance, Telstra Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 3.4%. However, we are curious as to how the high returns still resulted in flat growth for Telstra Group in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

As a next step, we compared Telstra Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.8% in the same period.

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. What is TLS worth today? The intrinsic value infographic in our free research report helps visualize whether TLS is currently mispriced by the market.

Is Telstra Group Efficiently Re-investing Its Profits?

Telstra Group has a high three-year median payout ratio of 101% (or a retention ratio of -1.0%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Telstra Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 95%. However, Telstra Group's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Telstra Group. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.