Stolt-Nielsen Limited's (OB:SNI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Stolt-Nielsen (OB:SNI) has had a great run on the share market with its stock up by a significant 22% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Stolt-Nielsen's ROE in this article.

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.

Check out our latest analysis for Stolt-Nielsen

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Stolt-Nielsen is:

15% = US$301m ÷ US$2.0b (Based on the trailing twelve months to February 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NOK1 of shareholders' capital it has, the company made NOK0.15 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. 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.

Stolt-Nielsen's Earnings Growth And 15% ROE

At first glance, Stolt-Nielsen seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 28% does temper our expectations. However, we are pleased to see the impressive 55% net income growth reported by Stolt-Nielsen over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.

As a next step, we compared Stolt-Nielsen's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 56% 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). Doing so will help them establish if the stock's future looks promising or ominous. Is SNI fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Stolt-Nielsen Making Efficient Use Of Its Profits?

Stolt-Nielsen's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Stolt-Nielsen is reinvesting its earnings efficiently.

Moreover, Stolt-Nielsen is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Accordingly, forecasts suggest that Stolt-Nielsen's future ROE will be 16% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Stolt-Nielsen's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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.