Shenandoah Telecommunications Company (NASDAQ:SHEN) is up, but the financial outlook looks weak: is the stock overvalued?

Shenandoah Telecommunications Inc (NASDAQ:SHEN) stock is up 14% in the past three months. However, we have decided to pay close attention to its weak finances as we doubt the current momentum will continue given the scenario. In particular, we’ll be paying attention to Shenandoah Telecommunications’ ROE today.

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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Shenandoah Telecommunications

How do you calculate return on equity?

The return on equity formula is:

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).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.01.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Shenandoah Telecommunications earnings growth and ROE of 0.7%

As you can see, the ROE of Shenandoah Telecommunications seems quite weak. Even compared to the industry average of 5.5%, 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. We believe there could also be other aspects that negatively influence the company’s earnings outlook. 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 17% over the same period. . It’s quite worrying.

NasdaqGS: SHEN Past Earnings Growth August 2, 2022

Earnings growth is an important factor in stock valuation. 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. Is Shenandoah Telecommunications valued fairly compared to other companies? These 3 assessment metrics might help you decide.

Is Shenandoah Telecommunications Reinvesting Profits Effectively?

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. You can see the 2 risks we have identified for Shenandoah Telecommunications by visiting our risk dashboard for free on our platform here.

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, we would be extremely cautious before making a decision on Shenandoah Telecommunications. The company has experienced a lack of earnings growth due to the fact that it retains very little profit and what little it retains is reinvested at a very low rate of return. Additionally, after studying current analyst estimates, we have found that the company’s earnings are expected to continue to decline in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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