Declining Stock and Solid Fundamentals: Is The Market Wrong About Hafnia Limited (OB:HAFNI)?

With its stock down 7.6% over the past three months, it is easy to disregard Hafnia (OB:HAFNI). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Hafnia'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.

See our latest analysis for Hafnia

How To Calculate Return On Equity?

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 Hafnia is:

32% = US$756m ÷ US$2.4b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.32 in profit.

What Has ROE Got To Do With 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. 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.

Hafnia's Earnings Growth And 32% ROE

To begin with, Hafnia has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 24% also doesn't go unnoticed by us. Under the circumstances, Hafnia's considerable five year net income growth of 60% was to be expected.

As a next step, we compared Hafnia'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 37%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hafnia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hafnia Using Its Retained Earnings Effectively?

Hafnia's significant three-year median payout ratio of 55% (where it is retaining only 45% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Hafnia has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 91% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 24% over the same period.

Conclusion

In total, we are pretty happy with Hafnia's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.