Shenandoah Telecommunications Company's (NASDAQ:SHEN) Dismal Stock Performance Reflects Weak Fundamentals

·4 min read

With its stock down 6.9% over the past month, it is easy to disregard Shenandoah Telecommunications (NASDAQ:SHEN). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Shenandoah Telecommunications

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

0.7% = US$4.4m ÷ US$644m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.01 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 0.7% ROE

As you can see, Shenandoah Telecommunications' ROE looks pretty weak. Even when compared to the industry average of 5.1%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 31% seen by Shenandoah Telecommunications was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Shenandoah Telecommunications' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 16% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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?

With a high three-year median payout ratio of 80% (implying that 20% of the profits are retained), most of Shenandoah Telecommunications' profits are being paid to shareholders, which explains the company's shrinking earnings. 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.

In addition, Shenandoah Telecommunications has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Shenandoah Telecommunications' performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

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