Are Telefónica Deutschland Holding AG’s (ETR:O2D) mixed financials driving the negative sentiment?

It’s hard to get excited after looking at the recent performance of Telefónica Deutschland Holding (ETR:O2D), as its stock is down 19% in the past three months. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Long-term fundamentals are usually what drive market outcomes, so pay close attention to them. In this article, we decided to focus on the ROE of Telefónica Deutschland Holding.

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 simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Telefónica Deutschland Holding

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE of Telefónica Deutschland Holding is:

6.3% = €362 million ÷ €5.7 billion (based on the last twelve months until June 2022).

“Yield” is the income the business has earned over the past year. This means that for every €1 of equity, the company generated €0.06 of profit.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. 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.

Profit growth and ROE of 6.3% for Telefónica Deutschland Holding

At first glance, Telefónica Deutschland Holding’s ROE does not look very promising. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 9.1%. However, we are pleasantly surprised to see that Telefónica Deutschland Holding has increased its net profit at a significant rate of 60% over the past five years. We believe there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.

We then compared Telefónica Deutschland Holding’s net profit growth with the industry and we are pleased to see that the company’s growth figure is higher than the industry which recorded a growth rate of 43% during the same period.

XTRA: O2D Past Earnings Growth September 24, 2022

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. Is Telefónica Deutschland Holding correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Telefónica Deutschland Holding make effective use of its retained earnings?

Telefónica Deutschland Holding’s very high LTM (or Trailing Twelve Month) payout ratio of 162% suggests that the company pays more to its shareholders than it earns. However, this did not hamper its ability to grow as we saw earlier. That said, it might be worth keeping an eye out for the high payout rate, as it’s a huge risk. Our risk dashboard should have the 2 risks we have identified for Telefónica Deutschland Holding.

Additionally, Telefónica Deutschland Holding has paid dividends over a nine-year period, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 143%. As a result, forecasts suggest that Telefónica Deutschland Holding’s future ROE will be 7.0%, which is again similar to the current ROE.

Conclusion

Overall, we have mixed feelings about Telefónica Deutschland Holding. Although the company has recorded quite impressive earnings growth, the low ROE and low rate of reinvestment make us skeptical that this growth will continue, particularly when or if the business is facing threats. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. 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.

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