Is Port of Tauranga Limited (NZSE:POT) stock trending lower due to poor financial results?

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With its stock down 10% in the past three months, it’s easy to overlook the port of Tauranga (NZSE:POT). Since stock prices are usually influenced by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the company’s key financial indicators. Specifically, we decided to study the ROE of the port of Tauranga in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for the Port of Tauranga

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for the Port of Tauranga is:

7.3% = NZ$102 million ÷ NZ$1.4 billion (based on trailing 12 months to June 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every NZ$1 of share capital it has, the company has made a profit of NZ$0.07.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Port of Tauranga profit growth and ROE of 7.3%

At first glance, the ROE of the port of Tauranga is not much to say. However, since the company’s ROE is similar to the industry average ROE of 7.3%, we can spare it some thought. We can see that the Port of Tauranga grew at an average five-year net revenue growth rate of 4.0%, which is a bit lower. Keep in mind that the company’s ROE is not very high. So this could also be one of the reasons for the company’s weak earnings growth.

As a next step, we benchmarked the Port of Tauranga’s net income growth with the industry and found that the business has a similar growth figure compared to the industry average growth rate of 4.0% during the same period.

NZSE: POT Past Earnings Growth February 14, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about the Port of Tauranga’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Is the port of Tauranga using its profits efficiently?

With a high three-year median payout ratio of 90% (or a retention rate of 9.5%), most of the Port of Tauranga’s profits go to shareholders. This certainly contributes to the weak earnings growth the company has seen.

Moreover, the Port of Tauranga has paid dividends over a period of at least ten years, which means that the management of the company is determined to pay dividends even if it means little or no profit growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 89% of its earnings over the next three years. Still, forecasts suggest the Port of Tauranga’s future ROE will reach 9.1%, even though the company’s payout ratio isn’t expected to change much.

Conclusion

All in all, we would be extremely cautious before making a decision on the port of Tauranga. Although the company has seen fairly strong earnings growth, the low ROE and low rate of reinvestment make us skeptical that this growth will continue, particularly when or if the business is facing threats. The latest forecasts from industry analysts show that the company should maintain its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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