Is Pacific Basin Shipping Limited's (HKG:2343) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Pacific Basin Shipping (HKG:2343) has had a great run on the share market with its stock up by a significant 16% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Pacific Basin Shipping's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Pacific Basin Shipping

How To 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 Pacific Basin Shipping is:

18% = US$322m ÷ US$1.8b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.18 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Pacific Basin Shipping's Earnings Growth And 18% ROE

To start with, Pacific Basin Shipping's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. This probably goes some way in explaining Pacific Basin Shipping's significant 53% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings 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.

As a next step, we compared Pacific Basin Shipping's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 44%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is 2343 worth today? The intrinsic value infographic in our free research report helps visualize whether 2343 is currently mispriced by the market.

Is Pacific Basin Shipping Using Its Retained Earnings Effectively?

Pacific Basin Shipping has a three-year median payout ratio of 41% (where it is retaining 59% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Pacific Basin Shipping is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Pacific Basin Shipping has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 51% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 12%) over the same period.

Summary

On the whole, we feel that Pacific Basin Shipping's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.