Most readers would already be aware that Nordic American Tankers (NYSE: NAT) inventory increased significantly by 23% over the last month. As most would know, this is basically what usually drives market price movements in the long run, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study North American tankers ROE in this article.
Return on Equity or ROE is a test of how effectively a company grows its value and manages investors’ money. In short, it is used to assess the profitability of a company in relation to its equity.
How do you calculate return on equity?
That formula for ROE is:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for North American tankers is:
15% = US $ 91m ÷ US $ 630m (Based on the subsequent twelve months to September 2020).
The ‘return’ is the annual profit. Another way of thinking about it is that for every capital value of $ 1, the company was able to earn $ 0.15 in profit.
What does ROE have to do with earnings growth?
We have already established that ROE acts as an effective profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to evaluate a company’s future ability to generate profits. In general, companies with a high return on equity and profits, all other things being equal, have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of North American tankers’ revenue growth and 15% ROE
At first glance, Nordic American Tankers seems to have a decent ROE. And when comparing with the industry, we found that the average ROE in the industry equals 13%. For this reason, Nordic American Tankers’ five-year net income decline of 16% raises the question of why the decent ROE did not turn for growth. We reckon there could be some other factors at play here that are hindering the growth of the company. Eg. The company pays out a large part of its earnings as dividends or faces competitive pressure.
So as a next step, we compared Nordic American Tankers’ performance with the industry and were disappointed to find that while the company has shrunk its earnings, the industry has increased its earnings at a rate of 4.4% over the same period.
The basis for attaching value to a company is largely tied to its earnings growth. The investor should try to determine if the expected growth or decline in earnings, as the case may be, is priced. By doing so, they will have an idea of whether the stock is heading out into clear blue waters, or if swampy waters await. If you’re wondering about Nordic American Tankers’ valuation, check it out this measure of the price-to-earnings ratio, compared to its industry.
Do North American tankers use the efficiency of their profits?
Nordic American Tankers has a high LTM (or last twelve months) payout ratio of 73% (ie it retains 27% of its profits). This suggests that the company pays most of its profits as dividends to its shareholders. This explains in a way why earnings have fallen. Since only a little is reinvested in the company, earnings growth would obviously be low or non-existent. Our risk dashboard should have the 3 risks we have identified for North American tankers.
In addition, Nordic American Tankers has paid dividends for at least ten years or more, which suggests that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio for the company is expected to increase to 365% over the next three years.
By and large, we feel that Nordic American Tankers has some positive qualities. Still, the low earnings growth is a bit worrying, especially considering that the company has a high return. Investors could have benefited from the high ROE if the company had reinvested more of its earnings. As discussed earlier, the company retains a small portion of its profits. When that is the case, recent forecasts for industry analysts show that analysts expect to see a huge improvement in the company’s earnings growth. To know more about the company’s future earnings growth forecasts, look at this for free reports on analyst forecasts for the company to find out more.
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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 shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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