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Telecom Plus' (LON:TEP) stock is up by a considerable 11% 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. Particularly, we will be paying attention to Telecom Plus' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Telecom Plus
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Telecom Plus is:
31% = UK£68m ÷ UK£221m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.31 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Telecom Plus' Earnings Growth And 31% ROE
First thing first, we like that Telecom Plus has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Probably as a result of this, Telecom Plus was able to see a decent net income growth of 15% over the last five years.
Next, on comparing with the industry net income growth, we found that Telecom Plus' growth is quite high when compared to the industry average growth of 8.1% in the same period, which is great to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TEP fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Telecom Plus Efficiently Re-investing Its Profits?
The really high three-year median payout ratio of 121% for Telecom Plus suggests that the company is paying its shareholders more than what it is earning. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. To know the 3 risks we have identified for Telecom Plus visit our risks dashboard for free.