Could The Market Correct S.N.T.G.N. Transgaz's Share Price?

S.N.T.G.N. Transgaz (BVB:TGN) has had a great run on the share market with its stock up by a significant 30% 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 S.N.T.G.N. Transgaz's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for S.N.T.G.N. Transgaz

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 S.N.T.G.N. Transgaz is:

8.3% = RON337m ÷ RON4.1b (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every RON1 worth of equity, the company was able to earn RON0.08 in profit.

What Has ROE Got To Do With 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. 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.

S.N.T.G.N. Transgaz's Earnings Growth And 8.3% ROE

At first glance, S.N.T.G.N. Transgaz's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.8%. But S.N.T.G.N. Transgaz saw a five year net income decline of 25% over the past five years. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

However, when we compared S.N.T.G.N. Transgaz's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.3% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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 S.N.T.G.N. Transgaz fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is S.N.T.G.N. Transgaz Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 61% (implying that 39% of the profits are retained), most of S.N.T.G.N. Transgaz's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for S.N.T.G.N. Transgaz visit our risks dashboard for free.

Additionally, S.N.T.G.N. Transgaz has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 55% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 7.2%.

Summary

In total, we would have a hard think before deciding on any investment action concerning S.N.T.G.N. Transgaz. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.