Wallenius Wilhelmsen ASA's (OB:WAWI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Wallenius Wilhelmsen (OB:WAWI) has had a rough month with its share price down 9.9%. 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. Particularly, we will be paying attention to Wallenius Wilhelmsen's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Wallenius Wilhelmsen

How To 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 Wallenius Wilhelmsen is:

24% = US$967m ÷ US$4.1b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. 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?

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Wallenius Wilhelmsen's Earnings Growth And 24% ROE

Firstly, we acknowledge that Wallenius Wilhelmsen has a significantly high ROE. Even when compared to the industry average of 25% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 60% net income growth seen by Wallenius Wilhelmsen was probably achieved as a result of the 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 56% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Wallenius Wilhelmsen's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wallenius Wilhelmsen Using Its Retained Earnings Effectively?

Wallenius Wilhelmsen has a three-year median payout ratio of 42% (where it is retaining 58% 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 Wallenius Wilhelmsen is reinvesting its earnings efficiently.

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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 53% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 19% over the same period.

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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.