Wisdom Marine Lines Co., Limited (Cayman)'s (TWSE:2637) Stock Is Going Strong: Is the Market Following Fundamentals?

Wisdom Marine Lines Limited (Cayman)'s (TWSE:2637) stock is up by a considerable 5.2% 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. In this article, we decided to focus on Wisdom Marine Lines Limited (Cayman)'s ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Wisdom Marine Lines Limited (Cayman)

How To 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 Wisdom Marine Lines Limited (Cayman) is:

10% = US$157m ÷ US$1.5b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Wisdom Marine Lines Limited (Cayman)'s Earnings Growth And 10% ROE

To start with, Wisdom Marine Lines Limited (Cayman)'s ROE looks acceptable. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. This certainly adds some context to Wisdom Marine Lines Limited (Cayman)'s exceptional 28% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Wisdom Marine Lines Limited (Cayman)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.

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. 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 Wisdom Marine Lines Limited (Cayman) is trading on a high P/E or a low P/E, relative to its industry.

Is Wisdom Marine Lines Limited (Cayman) Making Efficient Use Of Its Profits?

Wisdom Marine Lines Limited (Cayman)'s three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Wisdom Marine Lines Limited (Cayman) is reinvesting its earnings efficiently.

Moreover, Wisdom Marine Lines Limited (Cayman) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we feel that Wisdom Marine Lines Limited (Cayman)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Wisdom Marine Lines Limited (Cayman) visit our risks dashboard for free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com