Can Napier Port Holdings Limited (NZSE:NPH) Performance Keep Up Given Its Mixed Bag Of Fundamentals?
Napier Port Holdings' (NZSE:NPH) stock is up by 6.2% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Particularly, we will be paying attention to Napier Port Holdings' ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Napier Port Holdings
How Do You Calculate Return On Equity?
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 Napier Port Holdings is:
6.4% = NZ$22m ÷ NZ$346m (Based on the trailing twelve months to September 2020).
The 'return' is the yearly profit. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.06.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Napier Port Holdings' Earnings Growth And 6.4% ROE
On the face of it, Napier Port Holdings' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.4%. On the other hand, Napier Port Holdings reported a fairly low 2.0% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.
As a next step, we compared Napier Port Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 2.5% 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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Napier Port Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is Napier Port Holdings Using Its Retained Earnings Effectively?
While Napier Port Holdings has a decent three-year median payout ratio of 44% (or a retention ratio of 56%), it has seen very little growth in earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
In addition, Napier Port Holdings only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 104% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 4.8%) over the same period.
Conclusion
On the whole, we feel that the performance shown by Napier Port Holdings can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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. 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.
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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