Is Eimskipafélag Íslands hf.'s (ICE:EIM) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Eimskipafélag Íslands hf's (ICE:EIM) stock is up by a considerable 10% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Eimskipafélag Íslands hf'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Eimskipafélag Íslands hf

How Do You 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 Eimskipafélag Íslands hf is:

11% = €33m ÷ €293m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ISK1 worth of shareholders' equity, the company generated ISK0.11 in profit.

Why Is ROE Important For 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 Eimskipafélag Íslands hf's Earnings Growth And 11% ROE

At first glance, Eimskipafélag Íslands hf's ROE doesn't look very promising. Next, when compared to the average industry ROE of 19%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Eimskipafélag Íslands hf saw an exceptional 45% net income growth over the past 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 44% over the last few years.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Eimskipafélag Íslands hf fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Eimskipafélag Íslands hf Efficiently Re-investing Its Profits?

The three-year median payout ratio for Eimskipafélag Íslands hf is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Eimskipafélag Íslands hf is reinvesting its earnings efficiently.

Additionally, Eimskipafélag Íslands hf 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.

Summary

In total, it does look like Eimskipafélag Íslands hf has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. You can see the 4 risks we have identified for Eimskipafélag Íslands hf by visiting our risks dashboard for free on our platform here.

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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.