Is Great Lakes Dredge & Dock Corporation's (NASDAQ:GLDD) Recent Stock Performance Influenced By Its Financials In Any Way?

By
Simply Wall St
Published
January 11, 2022
NasdaqGS:GLDD
Source: Shutterstock

Great Lakes Dredge & Dock's (NASDAQ:GLDD) stock is up by 6.3% 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 Great Lakes Dredge & Dock's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Great Lakes Dredge & Dock

How To 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 Great Lakes Dredge & Dock is:

9.4% = US$35m ÷ US$375m (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

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.

Great Lakes Dredge & Dock's Earnings Growth And 9.4% ROE

On the face of it, Great Lakes Dredge & Dock's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.4%. Moreover, we are quite pleased to see that Great Lakes Dredge & Dock's net income grew significantly at a rate of 53% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Great Lakes Dredge & Dock's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:GLDD Past Earnings Growth January 11th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Great Lakes Dredge & Dock's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Great Lakes Dredge & Dock Efficiently Re-investing Its Profits?

Great Lakes Dredge & Dock doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

Overall, we feel that Great Lakes Dredge & Dock certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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