Most readers would already be aware that Austevoll Seafood's (OB:AUSS) stock increased significantly by 13% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Austevoll Seafood's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Austevoll Seafood is:
7.1% = kr1.7b ÷ kr24b (Based on the trailing twelve months to March 2021).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every NOK1 of its shareholder's investments, the company generates a profit of NOK0.07.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Austevoll Seafood's Earnings Growth And 7.1% ROE
On the face of it, Austevoll Seafood's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.0% either. Therefore, it might not be wrong to say that the five year net income decline of 9.1% seen by Austevoll Seafood was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.
From the 9.1% decline reported by the industry in the same period, we infer that Austevoll Seafood and its industry are both shrinking at a similar rate.
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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Austevoll Seafood's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Austevoll Seafood Using Its Retained Earnings Effectively?
In spite of a normal three-year median payout ratio of 47% (that is, a retention ratio of 53%), the fact that Austevoll Seafood's earnings have shrunk is quite puzzling. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Austevoll Seafood has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. Regardless, the future ROE for Austevoll Seafood is predicted to rise to 11% despite there being not much change expected in its payout ratio.
Overall, we have mixed feelings about Austevoll Seafood. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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