SalMar's (OB:SALM) stock is up by 4.8% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to SalMar's ROE today.
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.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for SalMar is:
16% = kr2.0b ÷ kr13b (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. One way to conceptualize this is that for each NOK1 of shareholders' capital it has, the company made NOK0.16 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
SalMar's Earnings Growth And 16% ROE
To begin with, SalMar seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. However, we are curious as to how the high returns still resulted in flat growth for SalMar in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.
When you consider the fact that the industry earnings have shrunk at a rate of 10% in the same period, the company's net income growth is pretty remarkable.
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. If you're wondering about SalMar's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is SalMar Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 73% (implying that the company keeps only 27% of its income) of its business to reinvest into its business), most of SalMar's profits are being paid to shareholders, which explains the absence of growth in earnings.
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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 78%. Still, forecasts suggest that SalMar's future ROE will rise to 26% even though the the company's payout ratio is not expected to change by much.
Overall, we are quite pleased with SalMar's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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.
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