TIM S.A.'s (BVMF:TIMS3) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

TIM (BVMF:TIMS3) has had a great run on the share market with its stock up by a significant 18% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to TIM's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

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 TIM is:

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

The 'return' is the profit over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.12.

See our latest analysis for TIM

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.

A Side By Side comparison of TIM's Earnings Growth And 12% ROE

It is hard to argue that TIM's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 12%. Thus, the low ROE certainly provides some context to TIM's very little net income growth of 2.6% seen over the past five years.

As a next step, we compared TIM'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 4.5% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for TIMS3? You can find out in our latest intrinsic value infographic research report.

Is TIM Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 53% (or a retention ratio of 47%), most of TIM's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 101% over the next three years. Regardless, the future ROE for TIM is speculated to rise to 20% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, TIM's performance is quite a big let-down. 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 analyst forecasts show that the company will continue to see an expansion in its earnings. 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.