Odfjell SE (OB:ODF) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 19% over the past three months, it is easy to disregard Odfjell (OB:ODF). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Odfjell's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Odfjell

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 Odfjell is:

29% = US$260m ÷ US$898m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each NOK1 of shareholders' capital it has, the company made NOK0.29 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Odfjell's Earnings Growth And 29% ROE

First thing first, we like that Odfjell has an impressive ROE. Additionally, a comparison with the average industry ROE of 27% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 69% net income growth seen by Odfjell was probably achieved as a result of the high ROE.

Next, on comparing with the industry net income growth, we found that Odfjell's growth is quite high when compared to the industry average growth of 54% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Odfjell fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Odfjell Using Its Retained Earnings Effectively?

Odfjell has a three-year median payout ratio of 45% (where it is retaining 55% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Odfjell is reinvesting its earnings efficiently.

Moreover, Odfjell is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Accordingly, forecasts suggest that Odfjell's future ROE will be 26% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Odfjell's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.