Declining Stock and Solid Fundamentals: Is The Market Wrong About Reach Subsea ASA (OB:REACH)?

It is hard to get excited after looking at Reach Subsea's (OB:REACH) recent performance, when its stock has declined 12% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Reach Subsea'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Reach Subsea

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 Reach Subsea is:

23% = kr241m ÷ kr1.0b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NOK1 of shareholders' capital it has, the company made NOK0.23 in profit.

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. 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. 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.

A Side By Side comparison of Reach Subsea's Earnings Growth And 23% ROE

Firstly, we acknowledge that Reach Subsea has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.6% also doesn't go unnoticed by us. As a result, Reach Subsea's exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Reach Subsea's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 38% in the same 5-year period.

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 Reach Subsea fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Reach Subsea Making Efficient Use Of Its Profits?

The three-year median payout ratio for Reach Subsea is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Reach Subsea is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Reach Subsea has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 29% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 33%, over the same period.

Summary

Overall, we are quite pleased with Reach Subsea's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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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.