Stock Analysis

Port of Tauranga Limited's (NZSE:POT) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

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NZSE:POT
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Port of Tauranga's (NZSE:POT) stock is up by 4.0% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Port of Tauranga's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Port of Tauranga

How Do You Calculate Return On Equity?

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:

5.4% = NZ$111m ÷ NZ$2.1b (Based on the trailing twelve months to June 2022).

The 'return' is the profit over the last twelve months. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 5.4% ROE

At first glance, Port of Tauranga's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.4%, we may spare it some thought. We can see that Port of Tauranga has grown at a five year net income growth average rate of 4.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Port of Tauranga's reported growth was lower than the industry growth of 5.6% in the same period, which is not something we like to see.

past-earnings-growth
NZSE:POT Past Earnings Growth October 1st 2022

Earnings growth is an important metric to consider when valuing a stock. 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. What is POT worth today? The intrinsic value infographic in our free research report helps visualize whether POT is currently mispriced by the market.

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.

In addition, Port of Tauranga has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 91% of its profits over the next three years. Regardless, the future ROE for Port of Tauranga is predicted to rise to 6.7% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, Port of Tauranga's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

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About NZSE:POT

Port of Tauranga

Port of Tauranga Limited, a port company, provides and manages port services and cargo handling facilities through the Port of Tauranga, MetroPort, and Timaru Container Terminal in New Zealand.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation0
Future Growth1
Past Performance4
Financial Health4
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet with proven track record.