The fundamentals of Proximus PLC (EBR:PROX) look quite solid: could the market be wrong about the stock?

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Proximus (EBR:PROX) had a difficult three months with a 27% drop in its share price. 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 this article, we have decided to focus on the ROE of Proximus.

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.

Discover our latest analysis for Proximus

How do you calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Proximus is:

14% = €446M ÷ €3.2B (based on trailing 12 months to June 2022).

The “yield” is the profit of the last twelve months. This therefore means that for every €1 of investment by its shareholder, the company generates a profit of €0.14.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Proximus profit growth and ROE of 14%

At first glance, Proximus seems to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 14%. As expected, the 3.2% drop in net income announced by Proximus is a bit surprising. We feel there could be other factors at play here that are preventing the company from growing. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

That being said, we compared the performance of Proximus with that of the sector and were concerned when we found that while the company had reduced its profits, the sector had increased its profits at a rate of 12% during the same period.

ENXTBR:PROX Past Earnings Growth September 17, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. A 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 outlook. Thus, you might want to check whether Proximus is trading on a high P/E or on a low P/E, relative to its sector.

Does Proximus use its retained earnings efficiently?

Proximus’ profit decline is not surprising given that the company devotes the bulk of its profits to paying dividends, judging by its three-year median payout ratio of 88% (or a retention rate 12%). With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent. Our risk dashboard should contain the 3 risks we have identified for Proximus.

Furthermore, Proximus has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. . Our latest analyst data shows that the company’s future payout ratio is expected to reach 115% over the next three years. Thus, the expected increase in the payout ratio explains the expected drop in the company’s ROE to 11%, over the same period.

Summary

Overall, we believe that Proximus certainly has positive factors to consider. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. Moreover, the latest forecasts from industry analysts show that analysts expect the company’s earnings to continue to decline in the future. 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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