Is poor financial outlook dragging down Shenandoah Telecommunications Company (NASDAQ: SHEN Stock?
Shenandoah Telecommunications Inc (NASDAQ:SHEN) had a tough three months with its stock price down 20%. 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.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Shenandoah Telecommunications is:
2.0% = $13 million ÷ $649 million (based on trailing twelve months to September 2021).
“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.02.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Shenandoah Telecommunications earnings growth and ROE of 2.0%
It is difficult to say that the ROE of Shenandoah Telecommunications is very good on its own. Even compared to the industry average ROE of 3.0%, the company’s ROE is pretty dismal. Given the circumstances, the significant decline in net income of 16% experienced by Shenandoah Telecommunications over the past five years is not surprising. We believe there could be other factors at play here as well. Such as – low income retention or poor capital allocation.
However, when we compared the growth of Shenandoah Telecommunications with the industry, we found that while the company’s earnings declined, the industry experienced earnings growth of 19% over the same period. . It’s quite worrying.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is Shenandoah Telecommunications valued fairly compared to other companies? These 3 assessment metrics might help you decide.
Is Shenandoah Telecommunications Reinvesting Profits Effectively?
Shenandoah Telecommunications’ high three-year median payout ratio of 128% suggests the company is stretching its resources to maintain its dividend payments, and it shows in its declining earnings. It is usually very difficult to maintain dividend payments above reported earnings. Our risk dashboard should have the 2 risks we identified for Shenandoah Telecommunications.
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. business. Our latest analyst data shows the company’s future payout ratio is expected to drop to 9.6% over the next three years.
All in all, we would have thought carefully before deciding on any investment action regarding Shenandoah Telecommunications. The low ROE, combined with the fact that the company pays out almost all, if not all, of its earnings in the form of dividends, has resulted in little or no earnings growth. Additionally, by studying the latest analyst forecasts, we have seen that the company’s earnings are expected to continue to contract. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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