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Did TeamTalk Limited (NZSE:TTK) Create Value For Shareholders?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in TeamTalk Limited (NZSE:TTK).

TeamTalk Limited (NZSE:TTK) outperformed the Wireless Telecommunication Services industry on the basis of its ROE – producing a higher 17.13% relative to the peer average of 12.71% over the past 12 months. While the impressive ratio tells us that TTK has made significant profits from little equity capital, ROE doesn’t tell us if TTK has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether TTK’s ROE is actually sustainable. See our latest analysis for TeamTalk

What you must know about ROE

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests NZ$1 in the form of equity, it will generate NZ$0.17 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

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Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of TeamTalk’s equity capital deployed. Its cost of equity is 9.01%. Given a positive discrepancy of 8.12% between return and cost, this indicates that TeamTalk pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NZSE:TTK Last Perf June 27th 18
NZSE:TTK Last Perf June 27th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue TeamTalk can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine TeamTalk’s debt-to-equity level. Currently the debt-to-equity ratio stands at a reasonable 88.08%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

NZSE:TTK Historical Debt June 27th 18
NZSE:TTK Historical Debt June 27th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. TeamTalk’s ROE is impressive relative to the industry average and also covers its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For TeamTalk, there are three pertinent factors you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is TeamTalk worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TeamTalk is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TeamTalk? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.