ZEAL Network SE's (ETR:TIMA) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Feb 9, 2025, 9:37 PM 4 min read

With its stock down 4.6% over the past month, it is easy to disregard ZEAL Network (ETR:TIMA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study ZEAL Network'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for ZEAL Network

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 ZEAL Network is:

17% = €48m ÷ €281m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.17 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

ZEAL Network's Earnings Growth And 17% ROE

To start with, ZEAL Network's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 11%. This probably laid the ground for ZEAL Network's significant 44% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that ZEAL Network's growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.

past-earnings-growth — XTRA:TIMA Past Earnings Growth February 10th 2025

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for TIMA? You can find out in our latest intrinsic value infographic research report.

Is ZEAL Network Efficiently Re-investing Its Profits?

ZEAL Network's very high three-year median payout ratio of 153% suggests that the company is paying more to its shareholders than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. You can see the 2 risks we have identified for ZEAL Network by visiting our risks dashboard for free on our platform here.

Additionally, ZEAL Network has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 78% over the next three years. However, ZEAL Network's future ROE is expected to decline to 14% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

In total, it does look like ZEAL Network has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.