Declining Stock and Decent Financials: Is The Market Wrong About Hamburger Hafen und Logistik Aktiengesellschaft (ETR:HHFA)?

Hamburger Hafen und Logistik (ETR:HHFA) has had a rough week with its share price down 5.3%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Hamburger Hafen und Logistik's ROE today.

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.

See our latest analysis for Hamburger Hafen und Logistik

How To Calculate Return On Equity?

ROE 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 Hamburger Hafen und Logistik is:

15% = €133m ÷ €873m (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Hamburger Hafen und Logistik's Earnings Growth And 15% ROE

To start with, Hamburger Hafen und Logistik's ROE looks acceptable. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Hamburger Hafen und Logistik in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Hamburger Hafen und Logistik's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.2% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hamburger Hafen und Logistik's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hamburger Hafen und Logistik Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 55% (implying that the company keeps only 45% of its income) of its business to reinvest into its business), most of Hamburger Hafen und Logistik's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Hamburger Hafen und Logistik has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 58%. However, Hamburger Hafen und Logistik's future ROE is expected to decline to 12% despite there being not much change anticipated in the company's payout ratio.

Summary

On the whole, we do feel that Hamburger Hafen und Logistik has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.