Golden Ocean Group Limited's (NASDAQ:GOGL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Published
June 26, 2022
NasdaqGS:GOGL
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With its stock down 28% over the past month, it is easy to disregard Golden Ocean Group (NASDAQ:GOGL). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Golden Ocean Group'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Golden Ocean Group

How Is ROE Calculated?

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 Golden Ocean Group is:

34% = US$629m ÷ US$1.9b (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.34 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Golden Ocean Group's Earnings Growth And 34% ROE

First thing first, we like that Golden Ocean Group has an impressive ROE. Even when compared to the industry average of 29% the company's ROE is pretty decent. As a result, Golden Ocean Group's remarkable 54% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing with the industry net income growth, we found that Golden Ocean Group's reported growth was lower than the industry growth of 68% in the same period, which is not something we like to see.

past-earnings-growth
NasdaqGS:GOGL Past Earnings Growth June 26th 2022

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Golden Ocean Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Golden Ocean Group Efficiently Re-investing Its Profits?

Golden Ocean Group has a significant three-year median payout ratio of 81%, meaning the company only retains 19% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Golden Ocean Group has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 72% of its profits over the next three years. However, Golden Ocean Group's future ROE is expected to decline to 19% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we feel that Golden Ocean Group certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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About NasdaqGS:GOGL

Golden Ocean Group

Golden Ocean Group Limited, a shipping company, owns and operates a fleet of dry bulk vessels comprising Newcastlemax, Capesize, Panamax, and Ultramax vessels worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth0
Past Performance6
Financial Health4
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Outstanding track record with adequate balance sheet.