Declining Stock and Decent Financials: Is The Market Wrong About Eimskipafélag Íslands hf. (ICE:EIM)?

Eimskipafélag Íslands hf (ICE:EIM) has had a rough month with its share price down 12%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Eimskipafélag Íslands hf's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Eimskipafélag Íslands hf is:

9.5% = €30m ÷ €317m (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ISK1 of shareholders' capital it has, the company made ISK0.09 in profit.

See our latest analysis for Eimskipafélag Íslands hf

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Eimskipafélag Íslands hf's Earnings Growth And 9.5% ROE

When you first look at it, Eimskipafélag Íslands hf's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 18% either. In spite of this, Eimskipafélag Íslands hf was able to grow its net income considerably, at a rate of 32% in the last five years. So, there might 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.

Next, on comparing Eimskipafélag Íslands hf's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Eimskipafélag Íslands hf's's valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.

Is Eimskipafélag Íslands hf Efficiently Re-investing Its Profits?

The three-year median payout ratio for Eimskipafélag Íslands hf is 37%, which is moderately low. The company is retaining the remaining 63%. By the looks of it, the dividend is well covered and Eimskipafélag Íslands hf is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Eimskipafélag Íslands hf is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, it does look like Eimskipafélag Íslands hf has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Eimskipafélag Íslands hf.

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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.