Has Port of Tauranga Limited's (NZSE:POT) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Port of Tauranga's (NZSE:POT) stock increased significantly by 14% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Port of Tauranga's ROE today.

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.

View our latest analysis for Port of Tauranga

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 Port of Tauranga is:

4.2% = NZ$91m ÷ NZ$2.2b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.04 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Port of Tauranga's Earnings Growth And 4.2% ROE

It is quite clear that Port of Tauranga's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 4.2%. Therefore, the low net income growth of 2.5% seen by Port of Tauranga over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Port of Tauranga's growth is quite high when compared to the industry average growth of 0.4% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Port of Tauranga is trading on a high P/E or a low P/E, relative to its industry.

Is Port of Tauranga Using Its Retained Earnings Effectively?

Port of Tauranga has a three-year median payout ratio of 89% (implying that it keeps only 11% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Moreover, Port of Tauranga has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 83%. Regardless, the future ROE for Port of Tauranga is predicted to rise to 6.8% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Port of Tauranga certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.