Dismal stock performance of Shenandoah Telecommunications Company (NASDAQ:SHEN) reflects weak fundamentals

With its stock down 6.9% over the past month, it’s easy to overlook Shenandoah Telecommunications Inc (NASDAQ: SHEN). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape long-term market trends. Specifically, we decided to study the ROE of Shenandoah Telecommunications in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Shenandoah Telecommunications

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Shenandoah Telecommunications is:

0.7% = $4.4 million ÷ $644 million (based on trailing 12 months to March 2022).

The “return” is the annual profit. This means that for every dollar of equity, the company generated $0.01 in profit.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Shenandoah Telecommunications earnings growth and ROE of 0.7%

As you can see, the ROE of Shenandoah Telecommunications seems quite low. Even compared to the industry average of 5.1%, the ROE figure is quite disappointing. Therefore, it may not be wrong to say that the 31% decline in net income over five years that Shenandoah Telecommunications saw was possibly the result of lower ROE. However, there could also be other factors leading to lower income. Such as – low income retention or poor capital allocation.

That being said, we compared the performance of Shenandoah Telecommunications with the industry and became concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 16% over the of the same period.

past earnings-growth

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether Shenandoah Telecommunications is trading on a high P/E or a low P/E, relative to its industry.

Is Shenandoah Telecommunications making effective use of its profits?

With a high three-year median payout ratio of 80% (implying that 20% of earnings are retained), most of Shenandoah Telecommunications’ earnings are paid out to shareholders, which explains the company’s declining earnings. With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent. To learn about the 2 risks we have identified for Shenandoah Telecommunications, visit our risk dashboard for free.

Additionally, Shenandoah Telecommunications has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. company.

Summary

Overall, Shenandoah Telecommunications’ performance is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. Moreover, the latest forecasts from industry analysts show that analysts expect the company’s earnings to continue to decline in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Sean B. Jackson