Is A.P. Møller - Mærsk A/S' (CPH:MAERSK B) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

A.P. Møller - Mærsk's (CPH:MAERSK B) stock is up by a considerable 43% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study A.P. Møller - Mærsk's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for A.P. Møller - Mærsk

How Is ROE Calculated?

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 A.P. Møller - Mærsk is:

5.2% = US$1.5b ÷ US$30b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every DKK1 worth of equity, the company was able to earn DKK0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of A.P. Møller - Mærsk's Earnings Growth And 5.2% ROE

At first glance, A.P. Møller - Mærsk's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.3%, we may spare it some thought. On the other hand, A.P. Møller - Mærsk reported a moderate 18% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that A.P. Møller - Mærsk's growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Is MAERSK B fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is A.P. Møller - Mærsk Using Its Retained Earnings Effectively?

With a LTM (or last twelve month) payout ratio of 39% (implying that the company retains 61% of its profits), it seems that A.P. Møller - Mærsk is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, A.P. Møller - Mærsk has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 16% over the next three years. As a result, the expected drop in A.P. Møller - Mærsk's payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.

Conclusion

On the whole, we do feel that A.P. Møller - Mærsk has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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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