2020 Bulkers Ltd. (OB:2020) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

2020 Bulkers (OB:2020) has had a rough three months with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to 2020 Bulkers' 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.

See our latest analysis for 2020 Bulkers

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 2020 Bulkers is:

54% = US$86m ÷ US$158m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.54 in profit.

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. 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. 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.

2020 Bulkers' Earnings Growth And 54% ROE

Firstly, we acknowledge that 2020 Bulkers has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 28% also doesn't go unnoticed by us. As a result, 2020 Bulkers' exceptional 35% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared 2020 Bulkers' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 51% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if 2020 Bulkers is trading on a high P/E or a low P/E, relative to its industry.

Is 2020 Bulkers Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 90% (implying that it keeps only 9.6% of profits) for 2020 Bulkers suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, 2020 Bulkers has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. 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 108%. However, 2020 Bulkers' future ROE is expected to decline to 29% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we feel that 2020 Bulkers certainly does have some positive factors to consider. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.