Will Weakness in Teekay Tankers Ltd.'s (NYSE:TNK) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 14% over the past three months, it is easy to disregard Teekay Tankers (NYSE:TNK). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Teekay Tankers' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Teekay Tankers

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 Teekay Tankers is:

26% = US$445m ÷ US$1.7b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.26 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Teekay Tankers' Earnings Growth And 26% ROE

Firstly, we acknowledge that Teekay Tankers has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. So, the substantial 42% net income growth seen by Teekay Tankers over the past five years isn't overly surprising.

As a next step, we compared Teekay Tankers' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 40% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Teekay Tankers fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Teekay Tankers Efficiently Re-investing Its Profits?

Teekay Tankers has a really low three-year median payout ratio of 5.7%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Teekay Tankers is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Teekay Tankers has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 40% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 20%) over the same period.

Conclusion

Overall, we are quite pleased with Teekay Tankers' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.