Moscow City Telephone Network (MCX:MGTS) has had a great run on the share market with its stock up by a significant 6.8% over the last month. However, we decided to pay attention to the company’s fundamentals which don’t appear to give a clear sign about the company’s financial health. Particularly, we will be paying attention to Moscow City Telephone Network’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Moscow City Telephone Network
How Is ROE Calculated?
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 Moscow City Telephone Network is:
22% = ₽16b ÷ ₽72b (Based on the trailing twelve months to December 2019).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every RUB1 worth of shareholders’ equity, the company generated RUB0.22 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. 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.
Moscow City Telephone Network’s Earnings Growth And 22% ROE
To begin with, Moscow City Telephone Network seems to have a respectable ROE. Especially when compared to the industry average of 13% the company’s ROE looks pretty impressive. Despite this, Moscow City Telephone Network’s five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Moscow City Telephone Network’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 8.0% in the same period, which is a bit concerning.
MISX:MGTS Past Earnings Growth May 5th 2020
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Moscow City Telephone Network’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Moscow City Telephone Network Making Efficient Use Of Its Profits?
Moscow City Telephone Network’s very high three-year median payout ratio of 152% suggests that the company is paying its shareholders more than what it is earning. This does go some way in explaining the negligible earnings growth seen by Moscow City Telephone Network. Its usually very hard to sustain dividend payments that are higher than reported profits. That’s a huge risk in our books. Our risks dashboard should have the 3 risks we have identified for Moscow City Telephone Network.
In addition, Moscow City Telephone Network has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
Overall, we have mixed feelings about Moscow City Telephone Network. While the company does have a high rate of return, its low earnings retention is probably what’s hampering its earnings growth. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Moscow City Telephone Network’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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