Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's (BUSE:MTELEKOM) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's (BUSE:MTELEKOM) stock increased significantly by 33% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság

How To Calculate Return On Equity?

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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is:

10% = Ft78b ÷ Ft744b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each HUF1 of shareholders' capital it has, the company made HUF0.10 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 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.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Earnings Growth And 10% ROE

When you first look at it, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 14%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság saw a modest net income growth of 14% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 65% over the next three years. Still, forecasts suggest that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's future ROE will rise to 18% 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

In total, it does look like Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.