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 three months with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Hamburger Hafen und Logistik's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Hamburger Hafen und Logistik

How Do You 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:

10% = €92m ÷ €881m (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 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. 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.

Hamburger Hafen und Logistik's Earnings Growth And 10% ROE

To start with, Hamburger Hafen und Logistik's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. However, while Hamburger Hafen und Logistik has a pretty respectable ROE, its five year net income decline rate was 3.3% . We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Hamburger Hafen und Logistik's performance with the industry and discovered the industry has shrunk at a rate of 4.8% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does appease the negative sentiment around the company to a certain extent.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hamburger Hafen und Logistik is trading on a high P/E or a low P/E, relative to its industry.

Is Hamburger Hafen und Logistik Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 61% (implying that 39% of the profits are retained), most of Hamburger Hafen und Logistik's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 3 risks we have identified for Hamburger Hafen und Logistik.

In addition, Hamburger Hafen und Logistik has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 73%. As a result, Hamburger Hafen und Logistik's ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.7% for future ROE.

Summary

In total, it does look like Hamburger Hafen und Logistik has some positive aspects to its business. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.