Will Weakness in Great Lakes Dredge & Dock Corporation's (NASDAQ:GLDD) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
May 13, 2021
NasdaqGS:GLDD

With its stock down 9.4% over the past three months, it is easy to disregard Great Lakes Dredge & Dock (NASDAQ:GLDD). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Great Lakes Dredge & Dock's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Great Lakes Dredge & Dock

How To Calculate Return On Equity?

ROE 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 Great Lakes Dredge & Dock is:

11% = US$41m ÷ US$357m (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Great Lakes Dredge & Dock's Earnings Growth And 11% ROE

To start with, Great Lakes Dredge & Dock's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.6%. This probably goes some way in explaining Great Lakes Dredge & Dock's significant 63% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

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 6.6% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:GLDD Past Earnings Growth May 14th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. 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.

Conclusion

On the whole, we feel that Great Lakes Dredge & Dock's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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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