With its stock down 11% over the past week, it’s easy to overlook Entravision Communications (NYSE:EVC). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will pay attention to the ROE of Entravision Communications today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Entravision Communications
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Entravision Communications is:
14% = $35 million ÷ $257 million (based on trailing 12 months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.14.
Why is ROE important for 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. Generally speaking, all things being equal, companies with a high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Entravision Communications’ earnings growth and ROE of 14%
For starters, Entravision Communications’ ROE looks acceptable. Additionally, the company’s ROE is similar to the industry average of 13%. For this reason, Entravision Communications’ 35% decline in net income over five years raises the question of why decent ROE has not translated into growth. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. These include poor revenue retention or poor capital allocation.
That being said, we benchmarked the performance of Entravision Communications against the industry and were concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 3.9 % over the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is Entravision Communications correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Entravision Communications effectively reinvest its profits?
Despite a normal LTM (or Trailing Twelve Month) payout ratio of 29% (i.e. a retention rate of 71%), the fact that Entravision Communications earnings have declined is quite confusing. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Entravision Communications has paid dividends over a nine-year period, suggesting that maintaining dividend payments is preferred by management, even if earnings are down.
Overall, we think Entravision Communications certainly has positive factors to consider. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 3 risks we have identified for Entravision Communications, visit our risk dashboard for free.
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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.