Are Hapag-Lloyd Aktiengesellschaft's (ETR:HLAG) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

Hapag-Lloyd (ETR:HLAG) has had a rough month with its share price down 13%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Hapag-Lloyd's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

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 Hapag-Lloyd is:

12% = €2.5b ÷ €20b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax 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 €0.12 in profit.

Check out our latest analysis for Hapag-Lloyd

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Hapag-Lloyd's Earnings Growth And 12% ROE

To start with, Hapag-Lloyd's ROE looks acceptable. Even so, when compared with the average industry ROE of 17%, we aren't very excited. On further research, we found that Hapag-Lloyd's net income growth of 4.6% over the past five years is quite low. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So there might be other reasons for the earnings growth to be low. 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 Hapag-Lloyd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 34% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hapag-Lloyd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hapag-Lloyd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 65% (that is, the company retains only 35% of its income) over the past three years for Hapag-Lloyd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Hapag-Lloyd has paid dividends over a period of six 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 73%. However, Hapag-Lloyd's future ROE is expected to decline to 3.5% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we have mixed feelings about Hapag-Lloyd. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.