Norwegian Air Shuttle ASA's (OB:NAS) Stock Is Going Strong: Is the Market Following Fundamentals?

Norwegian Air Shuttle (OB:NAS) has had a great run on the share market with its stock up by a significant 47% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Norwegian Air Shuttle's ROE in this article.

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 Norwegian Air Shuttle

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Norwegian Air Shuttle is:

30% = kr1.7b ÷ kr5.8b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every NOK1 of its shareholder's investments, the company generates a profit of NOK0.30.

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. 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.

A Side By Side comparison of Norwegian Air Shuttle's Earnings Growth And 30% ROE

To begin with, Norwegian Air Shuttle has a pretty high ROE which is interesting. Further, even comparing with the industry average if 27%, the company's ROE is quite respectable. As a result, Norwegian Air Shuttle's remarkable 26% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing with the industry net income growth, we found that Norwegian Air Shuttle's growth is quite high when compared to the industry average growth of 6.3% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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?

The three-year median payout ratio for Norwegian Air Shuttle is 35%, which is moderately low. The company is retaining the remaining 65%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Norwegian Air Shuttle is reinvesting its earnings efficiently.

Summary

Overall, we are quite pleased 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.