TIM S.A. (BVMF:TIMS3) Stock's On A Decline: Are Poor Fundamentals The Cause?

It is hard to get excited after looking at TIM's (BVMF:TIMS3) recent performance, when its stock has declined 13% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on TIM's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for TIM

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for TIM is:

12% = R$3.2b ÷ R$26b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

TIM's Earnings Growth And 12% ROE

It is hard to argue that TIM's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 12% either. The flat earnings by TIM over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared TIM's net income growth with the industry and discovered that the industry saw an average growth of 6.9% 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. Is TIMS3 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is TIM Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 55% (implying that the company keeps only 45% of its income) of its business to reinvest into its business), most of TIM's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, TIM 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 86% over the next three years. However, TIM's future ROE is expected to rise to 15% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we would be extremely cautious before making any decision on TIM. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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. 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.