With its stock down 13% over the past three months, it is easy to disregard Proximus (EBR:PROX). It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. Particularly, we will be paying attention to Proximus’ ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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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 Proximus is:
14% = €419m ÷ €3.0b (Based on the trailing twelve months to June 2020).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.14 in profit.
What Has ROE Got To Do With 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. 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.
Proximus’ Earnings Growth And 14% ROE
At first glance, Proximus seems to have a decent ROE. Especially when compared to the industry average of 9.7% the company’s ROE looks pretty impressive. For this reason, Proximus’ five year net income decline of 2.0% raises the question as to why the high ROE didn’t translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company’s growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
So, as a next step, we compared Proximus’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.3% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you’re wondering about Proximus”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Proximus Making Efficient Use Of Its Profits?
Proximus has a high three-year median payout ratio of 93% (that is, it is retaining 6.9% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Proximus visit our risks dashboard for free.
In addition, Proximus has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 79%. However, Proximus’ ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we feel that the performance shown by Proximus can be open to many interpretations. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. In addition, latest analyst forecasts reveal that the company’s earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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