Is Weakness In Western Bulk Chartering AS (OB:WEST) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 11% over the past week, it is easy to disregard Western Bulk Chartering (OB:WEST). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Western Bulk Chartering's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Western Bulk Chartering

How Is ROE Calculated?

ROE 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 Western Bulk Chartering is:

38% = US$24m ÷ US$63m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.38 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. 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.

Western Bulk Chartering's Earnings Growth And 38% ROE

Firstly, we acknowledge that Western Bulk Chartering has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 23% which is quite remarkable. As a result, Western Bulk Chartering's exceptional 56% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Western Bulk Chartering's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 48% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Western Bulk Chartering is trading on a high P/E or a low P/E, relative to its industry.

Is Western Bulk Chartering Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 83% (implying that it keeps only 17% of profits) for Western Bulk Chartering suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Along with seeing a growth in earnings, Western Bulk Chartering only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 80%. Regardless, Western Bulk Chartering's ROE is speculated to decline to 26% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Western Bulk Chartering's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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 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.