AS Tallinna Sadam (TAL:TSM1T) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

AS Tallinna Sadam (TAL:TSM1T) has had a great run on the share market with its stock up by a significant 5.6% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on AS Tallinna Sadam'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for AS Tallinna Sadam

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for AS Tallinna Sadam is:

8.5% = €31m ÷ €370m (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 €1 worth of equity, the company was able to earn €0.08 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of AS Tallinna Sadam's Earnings Growth And 8.5% ROE

On the face of it, AS Tallinna Sadam's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.8% doesn't go unnoticed by us. However, AS Tallinna Sadam's five year net income growth was quite low averaging at only 3.2%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared AS Tallinna Sadam's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 2.9% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for TSM1T? You can find out in our latest intrinsic value infographic research report.

Is AS Tallinna Sadam Making Efficient Use Of Its Profits?

AS Tallinna Sadam's very high three-year median payout ratio of 125% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. This is indicative of risk. You can see the 2 risks we have identified for AS Tallinna Sadam by visiting our risks dashboard for free on our platform here.

In addition, AS Tallinna Sadam only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 77% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Conclusion

On the whole, we feel that the performance shown by AS Tallinna Sadam can be open to many interpretations. While the company has a decent earnings growth backed by a moderate ROE, we do think that it is reinvesting only a very small portion of its profits, which may hurt future growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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