Is Weakness In Wallenius Wilhelmsen ASA (OB:WAWI) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Wallenius Wilhelmsen (OB:WAWI) has had a rough week with its share price down 6.2%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Wallenius Wilhelmsen's ROE in this article.

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.

See our latest analysis for Wallenius Wilhelmsen

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 Wallenius Wilhelmsen is:

24% = US$979m ÷ US$4.1b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. 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?

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 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.

Wallenius Wilhelmsen's Earnings Growth And 24% ROE

First thing first, we like that Wallenius Wilhelmsen has an impressive ROE. Further, even comparing with the industry average if 26%, the company's ROE is quite respectable. As a result, Wallenius Wilhelmsen's remarkable 60% net income growth seen over the past 5 years is likely aided by its high ROE.

As a next step, we compared Wallenius Wilhelmsen'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 60% 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). This then helps them determine if the stock is placed for a bright or bleak future. Is Wallenius Wilhelmsen fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wallenius Wilhelmsen Efficiently Re-investing Its Profits?

The three-year median payout ratio for Wallenius Wilhelmsen is 44%, which is moderately low. The company is retaining the remaining 56%. By the looks of it, the dividend is well covered and Wallenius Wilhelmsen is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Wallenius Wilhelmsen has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 55% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Wallenius Wilhelmsen's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.

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