Odfjell SE's (OB:ODF) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Odfjell's (OB:ODF) stock increased significantly by 7.7% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Odfjell's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Odfjell

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 Odfjell is:

31% = US$279m ÷ US$889m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.31 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Odfjell's Earnings Growth And 31% ROE

Firstly, we acknowledge that Odfjell has a significantly high ROE. Additionally, a comparison with the average industry ROE of 28% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 66% net income growth seen by Odfjell was probably achieved as a result of the high ROE.

As a next step, we compared Odfjell's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 51%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Odfjell's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Odfjell Using Its Retained Earnings Effectively?

Odfjell's three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. So it seems that Odfjell is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Odfjell has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its 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 51%. Still, forecasts suggest that Odfjell's future ROE will drop to 21% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Odfjell's performance has been quite good. 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.