Telecom Plus Plc's (LON:TEP) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Telecom Plus' (LON:TEP) stock is up by a considerable 5.4% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Telecom Plus' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Telecom Plus

How Is ROE Calculated?

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 Telecom Plus is:

31% = UK£71m ÷ UK£233m (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.31 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Telecom Plus' Earnings Growth And 31% ROE

First thing first, we like that Telecom Plus has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 18% net income growth seen by Telecom Plus over the past five years.

Next, on comparing with the industry net income growth, we found that Telecom Plus' growth is quite high when compared to the industry average growth of 9.6% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is TEP worth today? The intrinsic value infographic in our free research report helps visualize whether TEP is currently mispriced by the market.

Is Telecom Plus Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 112% for Telecom Plus suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings respectably, as we saw above. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. Our risks dashboard should have the 3 risks we have identified for Telecom Plus.

Moreover, Telecom Plus is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 66% over the next three years. The fact that the company's ROE is expected to rise to 40% over the same period is explained by the drop in the payout ratio.

Summary

In total, it does look like Telecom Plus has some positive aspects to its business. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.