Is Port of Tauranga Limited's (NZSE:POT) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Port of Tauranga's (NZSE:POT) stock increased significantly by 11% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Port of Tauranga's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Port of Tauranga

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 Port of Tauranga is:

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

The 'return' is the income the business earned over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.04.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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%. Accordingly, Port of Tauranga's low net income growth of 2.5% over the past five years can possibly be explained by the low ROE amongst other factors.

When you consider the fact that the industry earnings have shrunk at a rate of 1.5% in the same 5-year period, the company's net income growth is pretty remarkable.

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. 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 Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 89% (that is, the company retains only 11% of its income) over the past three years for Port of Tauranga suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 89% of its profits over the next three years. Regardless, the future ROE for Port of Tauranga is predicted to rise to 7.0% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Port of Tauranga has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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 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.