Declining Stock and Decent Financials: Is The Market Wrong About Far EasTone Telecommunications Co., Ltd. (TWSE:4904)?

Far EasTone Telecommunications (TWSE:4904) has had a rough three months with its share price down 1.7%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Far EasTone Telecommunications' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Far EasTone Telecommunications

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 Far EasTone Telecommunications is:

12% = NT$11b ÷ NT$91b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.12.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Far EasTone Telecommunications' Earnings Growth And 12% ROE

To start with, Far EasTone Telecommunications' ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. Far EasTone Telecommunications' decent returns aren't reflected in Far EasTone Telecommunications'mediocre five year net income growth average of 4.4%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then performed a comparison between Far EasTone Telecommunications' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 3.7% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is 4904 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Far EasTone Telecommunications Making Efficient Use Of Its Profits?

Far EasTone Telecommunications has a very high three-year median payout ratio of 110%, which suggests that the company is dipping into more than just its profits to pay its dividend and that shows in its low earnings growth number. This is indicative of risk. Our risks dashboard should have the 3 risks we have identified for Far EasTone Telecommunications.

Moreover, Far EasTone Telecommunications has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 99%. Regardless, the future ROE for Far EasTone Telecommunications is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Far EasTone Telecommunications has some positive attributes. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.