Ocean Wilsons Holdings Limited's (LON:OCN) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

By
Simply Wall St
Published
May 24, 2021
LSE:OCN
Source: Shutterstock

Ocean Wilsons Holdings' (LON:OCN) stock is up by a considerable 17% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Ocean Wilsons Holdings' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Ocean Wilsons Holdings

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 Ocean Wilsons Holdings is:

6.5% = US$48m ÷ US$744m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.06 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.

Ocean Wilsons Holdings' Earnings Growth And 6.5% ROE

When you first look at it, Ocean Wilsons Holdings' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 6.6%, so we won't completely dismiss the company. Having said that, Ocean Wilsons Holdings' five year net income decline rate was 7.5%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

From the 7.5% decline reported by the industry in the same period, we infer that Ocean Wilsons Holdings and its industry are both shrinking at a similar rate.

past-earnings-growth
LSE:OCN Past Earnings Growth May 25th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Ocean Wilsons Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Ocean Wilsons Holdings Making Efficient Use Of Its Profits?

Ocean Wilsons Holdings has a high three-year median payout ratio of 79% (that is, it is retaining 21% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 4 risks we have identified for Ocean Wilsons Holdings visit our risks dashboard for free.

Moreover, Ocean Wilsons Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 57% over the next three years.

Summary

On the whole, Ocean Wilsons Holdings' performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Ocean Wilsons Holdings' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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