Tattelecom (MCX:TTLK) has had a great run on the share market with its stock up by a significant 32% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Tattelecom's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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. One way to conceptualize this is that for each RUB1 of shareholders' capital it has, the company made 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Tattelecom's Earnings Growth And 15% ROE
On the face of it, Tattelecom's ROE is not much to talk about. However, its ROE is similar to the industry average of 15%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Tattelecom's net income grew significantly at a rate of 75% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Tattelecom's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.9%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Tattelecom fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Tattelecom Using Its Retained Earnings Effectively?
Tattelecom's significant three-year median payout ratio of 98% (where it is retaining only 1.9% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income 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.
In total, we're a bit ambivalent about Tattelecom's performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Tattelecom's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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