Should Weakness in Nokia Corporation's (HEL:NOKIA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

By
Simply Wall St
Published
February 24, 2022
HLSE:NOKIA
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With its stock down 7.0% over the past three months, it is easy to disregard Nokia (HEL:NOKIA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Nokia's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Nokia

How To Calculate Return On Equity?

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 Nokia is:

9.5% = €1.7b ÷ €17b (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.09.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Nokia's Earnings Growth And 9.5% ROE

To start with, Nokia's ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 14% does temper our expectations. On further research, we found that Nokia's net income growth of 3.4% over the past five years is quite low. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are keeping growth in earnings low. Such as, the company pays out a huge portion of its earnings as dividends, or is facing competitive pressures.

As a next step, we compared Nokia'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 5.8% in the same period.

past-earnings-growth
HLSE:NOKIA Past Earnings Growth February 24th 2022

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). This then helps them determine if the stock is placed for a bright or bleak future. Is NOKIA fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Nokia Efficiently Re-investing Its Profits?

While Nokia has a decent LTM (or last twelve month) payout ratio of 28% (or a retention ratio of 72%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Nokia 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 39% over the next three years. Still, forecasts suggest that Nokia's future ROE will rise to 12% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we feel that Nokia certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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