Most readers would already be aware that Genco Shipping & Trading’s (NYSE:GNK) stock increased significantly by 25% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Genco Shipping & Trading’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Genco Shipping & Trading
How To 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 Genco Shipping & Trading is:
24% = US$222m ÷ US$934m (Based on the trailing twelve months to March 2022).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.24.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
Genco Shipping & Trading’s Earnings Growth And 24% ROE
First thing first, we like that Genco Shipping & Trading has an impressive ROE. Even when compared to the industry average of 29% the company’s ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 28% net income growth seen by Genco Shipping & Trading was probably achieved as a result of the high ROE.
We then compared Genco Shipping & Trading’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 68% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Genco Shipping & Trading’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Genco Shipping & Trading Efficiently Re-investing Its Profits?
Genco Shipping & Trading has a LTM (or last twelve month) payout ratio of 32% (where it is retaining 68% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Genco Shipping & Trading is reinvesting its earnings efficiently.
Besides, Genco Shipping & Trading has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 83% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s ROE is expected to decline to 18% over the same period.
Summary
Overall, we are quite pleased with Genco Shipping & Trading’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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.
