Has AqualisBraemar LOC ASA's (OB:AQUA) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that AqualisBraemar LOC's (OB:AQUA) stock increased significantly by 60% over the past three months. 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 AqualisBraemar LOC'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.

View our latest analysis for AqualisBraemar LOC

How Do You Calculate Return On Equity?

Return on equity 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 AqualisBraemar LOC is:

5.6% = US$2.8m ÷ US$50m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.06 in profit.

What Is The Relationship Between ROE And 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 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.

AqualisBraemar LOC's Earnings Growth And 5.6% ROE

On the face of it, AqualisBraemar LOC's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.6%. Moreover, we are quite pleased to see that AqualisBraemar LOC's net income grew significantly at a rate of 54% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared AqualisBraemar LOC'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 54% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is AqualisBraemar LOC fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AqualisBraemar LOC Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 67% (implying that it keeps only 33% of profits) for AqualisBraemar LOC suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Along with seeing a growth in earnings, AqualisBraemar LOC only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like AqualisBraemar LOC has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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 AqualisBraemar LOC's 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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