Weak financial outlook appears to drag Shenandoah Telecommunications Company stock down (NASDAQ:SHEN)
Shenandoah Telecommunications (NASDAQ:SHEN) had a tough three months with its share price down 13%. Since stock prices are usually influenced by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the company’s key financial indicators. In particular, we’ll be paying attention to Shenandoah Telecommunications’ ROE today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Shenandoah Telecommunications
How to 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:
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. This means that for every dollar of shareholders’ equity, the company generated $0.02 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 its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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 2.0%
It is clear that the ROE of Shenandoah Telecommunications is rather weak. Not only that, even compared to the industry average of 3.0%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 16% decline in net income over five years that Shenandoah Telecommunications saw may be 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 benchmarked the performance of Shenandoah Telecommunications with the industry and became concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 19% over the of the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about the valuation of Shenandoah Telecommunications, check out this indicator of its price/earnings ratio, relative to its sector.
Is Shenandoah Telecommunications making effective use of its profits?
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.
Additionally, Shenandoah Telecommunications has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows the company’s future payout ratio is expected to drop to 9.6% over the next three years.
Overall, Shenandoah Telecommunications’ performance is quite disappointing. 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, 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.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.