Can Mixed Fundamentals Have A Negative Impact on Tattelecom Public Joint-Stock Company (MCX:TTLK) Current Share Price Momentum?

Tattelecom's (MCX:TTLK) stock is up by a considerable 12% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Tattelecom's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Tattelecom

How Is ROE Calculated?

Return on equity 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 Tattelecom is:

15% = ₽990m ÷ ₽6.5b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.15 in profit.

Why Is ROE Important For 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.

Tattelecom's Earnings Growth And 15% ROE

When you first look at it, Tattelecom's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 13%. Looking at Tattelecom's exceptional 75% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Tattelecom's growth is quite high when compared to the industry average growth of 9.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Tattelecom fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tattelecom Using Its Retained Earnings Effectively?

Tattelecom has a significant three-year median payout ratio of 98%, meaning the company only retains 1.9% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Tattelecom has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that the performance shown by Tattelecom can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. 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 Tattelecom'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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