South Port New Zealand’s (NZSE:SPN) stock is up by 2.3% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study South Port New Zealand’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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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 South Port New Zealand is:
20% = NZ$12m ÷ NZ$60m (Based on the trailing twelve months to June 2023).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each NZ$1 of shareholders’ capital it has, the company made NZ$0.20 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
A Side By Side comparison of South Port New Zealand’s Earnings Growth And 20% ROE
To begin with, South Port New Zealand seems to have a respectable ROE. On comparing with the average industry ROE of 4.9% the company’s ROE looks pretty remarkable. This probably laid the ground for South Port New Zealand’s moderate 6.0% net income growth seen over the past five years.
Next, on comparing South Port New Zealand’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 6.0% over the last few years.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is South Port New Zealand fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is South Port New Zealand Making Efficient Use Of Its Profits?
South Port New Zealand has a significant three-year median payout ratio of 62%, meaning that it is left with only 38% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, South Port New Zealand 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.
In total, we are pretty happy with South Port New Zealand’s performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. To gain further insights into South Port New Zealand’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.