Has Vodacom Group Limited (JSE:VOD) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that Vodacom Group's (JSE:VOD) stock increased by 9.2% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Vodacom Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Vodacom Group

How Do You Calculate Return On Equity?

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 Vodacom Group is:

19% = R19b ÷ R104b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every ZAR1 worth of shareholders' equity, the company generated ZAR0.19 in profit.

What Is The Relationship Between ROE And 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. 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.

Vodacom Group's Earnings Growth And 19% ROE

To start with, Vodacom Group's ROE looks acceptable. Be that as it may, the company's ROE is still quite lower than the industry average of 27%. Additionally, the flat earnings seen by Vodacom Group over the past five years doesn't paint a very bright picture. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are causing the flat growth in earnings. For example, it could be that the company has a high payout ratio or the business has alloacted capital, for instance.

Next, on comparing Vodacom Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 1.3% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for VOD? You can find out in our latest intrinsic value infographic research report.

Is Vodacom Group Efficiently Re-investing Its Profits?

Vodacom Group has a high three-year median payout ratio of 80% (or a retention ratio of 20%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Vodacom Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 72%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Conclusion

On the whole, we do feel that Vodacom Group has some positive attributes. While no doubt its earnings growth is pretty decent, we do feel that the reinvestment rate is pretty low. Meaning, the earnings growth number could have been significantly higher, had the company been retaining more of its profits. 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 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.