by Gaurav Seetharam

Three minutes after the opening bell on Oct. 24, 40 million shares changed hands, and Shaw Communications (TSX: SJR, NYSE: SJR) lost nearly $2.5 billion of its market capitalization. The share price would recover slightly, ending the day at $24.48 in Toronto and USD$23.47 in New York, but investors had expressed clear disappointment with the company’s fourth-quarter earnings.

Net income dropped 12% to $117 million from $133 million in the same quarter a year ago, yet somehow, revenue bumped up slightly in all three segments. Compared to last year, cable, satellite, and media brought in an additional $15 million, $6 million, and $14 million, respectively.

Revenue up, net income down.  Huh?
It’s true that Shaw has outpaced the field with its average revenue growth (3 year) of 13.8% to the industry’s 11.3%, but its net income growth lags far behind the pack (10.7% to 47.8%). Things get even more muddled when you notice that Shaw actually has a higher-than-normal operating margin (27.1% to 18.9%). I pulled some data to make sense of it, and here’s what I found:

While BCE and Rogers have seen steady improvement in their net income margins, Shaw (yellow line below) appears to have plateaued around 14.5%.

Source: Data from S&P Capital IQ

Part of the problem is their Earnings from Continuing Operations Margin dropped to 15.2% from 21.7% five years ago. Companies that rely on one-time events for revenue, such as selling a subsidiary, building, or equipment, are unable to streamline their expenses.

Another important metric to consider is the Return on Common Equity. Subtracting out preferred dividends makes it a better measure of shareholder return than the simple Return on Equity ratio.

Source: Data from S&P Capital IQ

It’s the clearest indication of a firm’s profitability and this graph speaks for itself.

Foolish Bottom Line

Shaw’s feeling the impact of its participation in a mature market.  And its quarterly results did nothing to quell investor’s fear that growth from here will be a challenge.  Although the company’s cable network acts as a sturdy piece of infrastructure, how the company plans to leverage this asset to grow the business from here remains somewhat of a mystery.

More from The Motley Fool
Interested in a top small-cap stock idea to go with your large-cap oil investment? The Motley Fool’s senior investment advisor has a great small-cap just for you. Click here to download a FREE copy of “A Top Canadian Small Cap for 2013 — and Beyond.”

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Disclosure: Gaurav Seetharam does not own shares of any companies mentioned.