Port of Tauranga Limited's (NZSE:POT) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?
Port of Tauranga's (NZSE:POT) stock is up by a considerable 11% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Particularly, we will be paying attention to Port of Tauranga's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Port of Tauranga
How Do You Calculate Return On Equity?
Return on equity 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 Port of Tauranga is:
5.4% = NZ$111m ÷ NZ$2.1b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.05 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Port of Tauranga's Earnings Growth And 5.4% ROE
When you first look at it, Port of Tauranga's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.4%. We can see that Port of Tauranga has grown at a five year net income growth average rate of 4.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.
We then compared Port of Tauranga's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.6% in the same period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for POT? You can find out in our latest intrinsic value infographic research report.
Is Port of Tauranga Making Efficient Use Of Its Profits?
Port of Tauranga has a three-year median payout ratio of 89% (implying that it keeps only 11% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.
Additionally, Port of Tauranga has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 91% of its profits over the next three years. Still, forecasts suggest that Port of Tauranga's future ROE will rise to 6.7% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we would be extremely cautious before making any decision on Port of Tauranga. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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