Is Weakness In Ocean Bio-Chem, Inc. (NASDAQ:OBCI) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Ocean Bio-Chem (NASDAQ:OBCI) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Ocean Bio-Chem'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.

View our latest analysis for Ocean Bio-Chem

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 Ocean Bio-Chem is:

24% = US$9.4m ÷ US$39m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.24 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. 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. 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.

Ocean Bio-Chem's Earnings Growth And 24% ROE

Firstly, we acknowledge that Ocean Bio-Chem has a significantly high ROE. Additionally, a comparison with the average industry ROE of 24% also portrays the company's ROE in a good light. Given the circumstances, the significant 35% net income growth seen by Ocean Bio-Chem over the last five years is not surprising.

Next, on comparing with the industry net income growth, we found that Ocean Bio-Chem's growth is quite high when compared to the industry average growth of 12% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ocean Bio-Chem's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ocean Bio-Chem Using Its Retained Earnings Effectively?

Ocean Bio-Chem's ' three-year median payout ratio is on the lower side at 3.6% implying that it is retaining a higher percentage (96%) of its profits. So it looks like Ocean Bio-Chem is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Ocean Bio-Chem has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Ocean Bio-Chem's performance. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Ocean Bio-Chem.

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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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