Port of Tauranga Limited's (NZSE:POT) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Port of Tauranga's (NZSE:POT) recent performance, when its stock has declined 6.3% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Port of Tauranga's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Port of Tauranga

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Port of Tauranga is:

7.7% = NZ$90m ÷ NZ$1.2b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.08 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 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.

Port of Tauranga's Earnings Growth And 7.7% ROE

On the face of it, Port of Tauranga's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.7%, is definitely interesting. This certainly adds some context to Port of Tauranga's moderate 5.9% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

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 4.7% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Port of Tauranga's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Port of Tauranga Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 90% (or a retention ratio of 10.0%) for Port of Tauranga suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Port of Tauranga 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 is expected to keep paying out approximately 89% of its profits over the next three years. However, Port of Tauranga's ROE is predicted to rise to 9.7% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that Port of Tauranga certainly does have some positive factors to consider. Namely, its high earnings growth, which was probably achieved due to its respectable ROE. However, the considerably low reinvestment rate does diminish our excitement to a certain extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.
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