Norwegian Air Shuttle ASA's (OB:NAS) Stock Been Rising: Are Strong Financials Guiding The Market?

Norwegian Air Shuttle's (OB:NAS) stock is up by 9.0% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Norwegian Air Shuttle's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Norwegian Air Shuttle

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 Norwegian Air Shuttle is:

24% = kr1.5b ÷ kr6.2b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every NOK1 of its shareholder's investments, the company generates a profit of NOK0.24.

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. 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. 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.

A Side By Side comparison of Norwegian Air Shuttle's Earnings Growth And 24% ROE

First thing first, we like that Norwegian Air Shuttle has an impressive ROE. Further, even comparing with the industry average if 27%, the company's ROE is quite respectable. Therefore, it looks like the high ROE is what probably supported Norwegian Air Shuttle's modest 14% growth over the past five years.

We then compared Norwegian Air Shuttle's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.2% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Norwegian Air Shuttle is trading on a high P/E or a low P/E, relative to its industry.

Is Norwegian Air Shuttle Efficiently Re-investing Its Profits?

Norwegian Air Shuttle doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Summary

In total, we are pretty happy with Norwegian Air Shuttle's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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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.