Is The Navigator Company, S.A.'s (ELI:NVG) Latest Stock Performance Being Led By Its Strong Fundamentals?

Most readers would already know that Navigator Company's (ELI:NVG) stock increased by 3.2% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Navigator Company'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. 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 Navigator Company

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 Navigator Company is:

26% = €323m ÷ €1.2b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.26 in profit.

What Has ROE Got To Do With 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.

Navigator Company's Earnings Growth And 26% ROE

Firstly, we acknowledge that Navigator Company has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. This likely paved the way for the modest 16% net income growth seen by Navigator Company over the past five years.

Next, on comparing with the industry net income growth, we found that Navigator Company's growth is quite high when compared to the industry average growth of 8.6% in the same period, which is great to see.

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. Has the market priced in the future outlook for NVG? You can find out in our latest intrinsic value infographic research report.

Is Navigator Company Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 89% (or a retention ratio of 11%) for Navigator Company suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Navigator Company has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 84%. Still, forecasts suggest that Navigator Company's future ROE will drop to 15% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Navigator Company's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.