Is Shenandoah Telecommunications Company’s (NASDAQ:SHEN) Recent Performance Underpinned By Weak Financials?
With its stock down 25% over the past three months, it is easy to disregard Shenandoah Telecommunications (NASDAQ:SHEN). We decided to study the company’s financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Shenandoah Telecommunications’ 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Shenandoah Telecommunications
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Shenandoah Telecommunications is:
1.2% = US$8.0m ÷ US$653m (Based on the trailing twelve months to December 2023).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.01 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Shenandoah Telecommunications’ Earnings Growth And 1.2% ROE
It is quite clear that Shenandoah Telecommunications’ ROE is rather low. Even compared to the average industry ROE of 9.2%, the company’s ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 48% seen by Shenandoah Telecommunications was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. Such as – low earnings retention or poor allocation of capital.
So, as a next step, we compared Shenandoah Telecommunications’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 10% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. One 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 prospects. So, you may want to check if Shenandoah Telecommunications is trading on a high P/E or a low P/E, relative to its industry.
Is Shenandoah Telecommunications Making Efficient Use Of Its Profits?
Shenandoah Telecommunications has a high three-year median payout ratio of 56% (that is, it is retaining 44% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for Shenandoah Telecommunications visit our risks dashboard for free.
Additionally, Shenandoah Telecommunications has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
On the whole, Shenandoah Telecommunications’ performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Additionally, the latest industry analyst forecasts show that analysts expect the company’s earnings to continue to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
