Is SalMar ASA's (OB:SALM) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that SalMar's (OB:SALM) stock increased significantly by 10% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to SalMar's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for SalMar

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for SalMar is:

21% = kr2.1b ÷ kr10b (Based on the trailing twelve months to March 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

SalMar's Earnings Growth And 21% ROE

To start with, SalMar's ROE looks acceptable. On comparing with the average industry ROE of 8.1% the company's ROE looks pretty remarkable. This probably laid the ground for SalMar's moderate 18% net income growth seen over the past five years.

We then compared SalMar's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.2% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is SALM worth today? The intrinsic value infographic in our free research report helps visualize whether SALM is currently mispriced by the market.

Is SalMar Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 73% (or a retention ratio of 27%) for SalMar suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%. Regardless, the future ROE for SalMar is predicted to rise to 25% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that SalMar's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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. 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.
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