Is the weakness in shares of Orient Telecoms Plc (LON:ORNT) a sign that the market could be wrong given its strong financial outlook?


With its stock down 13% in the past three months, it’s easy to overlook Orient Telecoms (LON:ORNT). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. Specifically, we decided to study the ROE of Orient Telecoms in this article.

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 other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Orient Telecoms

How to calculate return on equity?

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 Orient Telecoms is:

25% = UK£121,000 ÷ UK£482,000 (based on past twelve months to September 2021).

The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every pound of share capital it has, the company has made a profit of 0.25 pounds.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A Side-by-Side Comparison of Orient Telecoms Earnings Growth and 25% ROE

First, we recognize that Orient Telecoms has a significantly high ROE. Second, even when compared to the industry average of 15%, the company’s ROE is quite impressive. As a result, Orient Telecoms’ exceptional 65% net profit growth observed over the past five years comes as no surprise.

In a next step, we benchmarked Orient Telecoms’ net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 27%.

LSE: ORNT Past Earnings Growth June 7, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is Orient Telecoms correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Is Orient Telecoms using its retained earnings efficiently?

Since Orient Telecoms does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.

Summary

All in all, we are rather satisfied with the performance of Orient Telecoms. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 2 risks we have identified for Orient Telecoms by visiting our risk dashboard for free on our platform here.

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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