Has SalMar ASA (OB:SALM) Stock's Recent Performance Got Anything to Do With Its Financial Health?

By
Simply Wall St
Published
January 13, 2022
OB:SALM
Source: Shutterstock

Most readers would already know that SalMar's (OB:SALM) stock increased by 1.8% over the past month. 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. In this article, we decided to focus on SalMar's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for SalMar

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 SalMar is:

16% = kr2.3b ÷ kr14b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.16 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. 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.

SalMar's Earnings Growth And 16% ROE

To begin with, SalMar seems to have a respectable ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. For this reason, SalMar's five year net income decline of 2.6% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

As a next step, we compared SalMar's performance with the industry and discovered the industry has shrunk at a rate of 10% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. While this is not particularly good, its not particularly bad either.

past-earnings-growth
OB:SALM Past Earnings Growth January 13th 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for SALM? You can find out in our latest intrinsic value infographic research report.

Is SalMar Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 73% (implying that 27% of the profits are retained), most of SalMar's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for SalMar visit our risks dashboard for free.

In addition, SalMar has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 84%. Regardless, the future ROE for SalMar is predicted to rise to 24% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that SalMar certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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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