Does Lerøy Seafood Group ASA's (OB:LSG) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Lerøy Seafood Group (OB:LSG) has had a great run on the share market with its stock up by a significant 22% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Lerøy Seafood Group's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Lerøy Seafood Group

How Is ROE Calculated?

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 Lerøy Seafood Group is:

1.1% = kr211m ÷ kr20b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every NOK1 of its shareholder's investments, the company generates a profit of NOK0.01.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Lerøy Seafood Group's Earnings Growth And 1.1% ROE

As you can see, Lerøy Seafood Group's ROE looks pretty weak. Even when compared to the industry average of 3.9%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 7.0% seen by Lerøy Seafood Group over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Lerøy Seafood Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.3% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Lerøy Seafood Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lerøy Seafood Group Making Efficient Use Of Its Profits?

Lerøy Seafood Group's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 57% (or a retention ratio of 43%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Lerøy Seafood Group.

Moreover, Lerøy Seafood Group 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 54% of its profits over the next three years. Still, forecasts suggest that Lerøy Seafood Group's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, Lerøy Seafood Group's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.