Yahoo Finance ZEAL Network SE's (ETR:TIMA) Dismal Stock Performance Reflects Weak Fundamentals
With its stock down 8.8% over the past three months, it is easy to disregard ZEAL Network (ETR:TIMA). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study ZEAL Network's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for ZEAL Network
How To Calculate Return On Equity?
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 ZEAL Network is:
5.5% = €15m ÷ €265m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.05 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of ZEAL Network's Earnings Growth And 5.5% ROE
On the face of it, ZEAL Network's ROE is not much to talk about. However, its ROE is similar to the industry average of 5.5%, so we won't completely dismiss the company. Having said that, ZEAL Network's five year net income decline rate was 8.8%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.
However, when we compared ZEAL Network's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.8% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is TIMA worth today? The intrinsic value infographic in our free research report helps visualize whether TIMA is currently mispriced by the market.
Is ZEAL Network Efficiently Re-investing Its Profits?
ZEAL Network's very high three-year median payout ratio of 162% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits.
Additionally, ZEAL Network has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 85% over the next three years. As a result, the expected drop in ZEAL Network's payout ratio explains the anticipated rise in the company's future ROE to 8.8%, over the same period.
Summary
On the whole, ZEAL Network's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
