Do Fundamentals Have Any Role To Play In Driving South Port New Zealand Limited's (NZSE:SPN) Stock Up Recently?

Most readers would already know that South Port New Zealand's (NZSE:SPN) stock increased by 9.3% 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 investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study South Port New Zealand's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for South Port New Zealand

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for South Port New Zealand is:

21% = NZ$9.4m ÷ NZ$46m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.21 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. 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 South Port New Zealand's Earnings Growth And 21% ROE

At first glance, South Port New Zealand seems to have a decent ROE. Especially when compared to the industry average of 4.9% the company's ROE looks pretty impressive. Despite this, South Port New Zealand's five year net income growth was quite low averaging at only 3.4%. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing South Port New Zealand's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 3.4% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is South Port New Zealand fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is South Port New Zealand Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 72% (that is, the company retains only 28% of its income) over the past three years for South Port New Zealand suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, South Port New Zealand has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, it does look like South Port New Zealand has some positive aspects to its business. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low.

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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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