Is S.N.T.G.N. Transgaz S.A.'s (BVB:TGN) Stock On A Downtrend As A Result Of Its Poor Financials?

S.N.T.G.N. Transgaz (BVB:TGN) has had a rough month with its share price down 1.7%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study S.N.T.G.N. Transgaz's ROE in this article.

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.

See our latest analysis for S.N.T.G.N. Transgaz

How Do You Calculate Return On Equity?

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:

8.6% = RON328m ÷ RON3.8b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.09 in profit.

Why Is ROE Important For Earnings Growth?

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

S.N.T.G.N. Transgaz's Earnings Growth And 8.6% 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 8.6%. But then again, S.N.T.G.N. Transgaz's five year net income shrunk at a rate of 8.1%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.6% in the same period, we still found S.N.T.G.N. Transgaz's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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?

S.N.T.G.N. Transgaz has a high three-year median payout ratio of 61% (that is, it is retaining 39% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 4 risks we have identified for S.N.T.G.N. Transgaz visit our risks dashboard for free.

In addition, S.N.T.G.N. Transgaz 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 60%.

Summary

Overall, we would be extremely cautious before making any decision on 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of S.N.T.G.N. Transgaz's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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