Does the weak fundamentals of Tenaris SA (BIT: TEN) mean that the market could correct its share price?

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Tenaris (BIT: TEN) has had an excellent performance in the equity market with a significant increase in its share of 6.9% over the past month. However, in this article, we have decided to focus on its weak fundamentals, as a company’s long-term financial performance is what ultimately dictates market performance. In this article, we have decided to focus on the ROE of Tenaris.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest analysis for Tenaris

How is the ROE calculated?

Return on equity can be calculated using the formula:

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

Thus, based on the above formula, the ROE of Tenaris is:

6.9% = US $ 827 million ÷ US $ 12 billion (based on the last twelve months to September 2021).

The “return” is the annual profit. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.07 in profit.

What is the relationship between ROE and profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A side-by-side comparison of Tenaris earnings growth and 6.9% ROE

At first glance, Tenaris’ ROE does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is lower than the industry average of 9.6%. For this reason, Tenaris’ five-year net profit decline of 5.2% is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low profit retention or misallocation of capital.

So, in the next step, we compared the performance of Tenaris to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate of 21 % during the same period.

BIT: TEN Past profit growth on January 4, 2022

Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. Is the TEN correctly assessed? This intrinsic business value infographic has everything you need to know.

Is Tenaris Efficiently Using Its Retained Earnings?

Tenaris’ decline in profits is not surprising given that the company spends most of its profits paying dividends, judging by its three-year median payout rate of 51% (or a retention rate of 49%). %). With only a little money reinvested in the business, earnings growth would obviously be little or no growth.

Additionally, Tenaris has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 41%. As a result, Tenaris ‘ROE is not expected to change much either, which we have deduced from analysts’ estimate of 6.1% for future ROE.

Summary

Overall, Tenaris’ performance is quite disappointing. The company has experienced a lack of earnings growth due to keeping very little earnings and what little it keeps is reinvested at a very low rate of return. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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