Yahoo Finance Genco Shipping & Trading Limited's (NYSE:GNK) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Genco Shipping & Trading (NYSE:GNK) has had a great run on the share market with its stock up by a significant 33% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Genco Shipping & Trading's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Genco Shipping & Trading
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Genco Shipping & Trading is:
16% = US$159m ÷ US$968m (Based on the trailing twelve months to December 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 $0.16.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Genco Shipping & Trading's Earnings Growth And 16% ROE
To begin with, Genco Shipping & Trading seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 25% does temper our expectations. That being the case, the significant five-year 47% net income growth reported by Genco Shipping & Trading comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.
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 61% in the same period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Genco Shipping & Trading fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Genco Shipping & Trading Making Efficient Use Of Its Profits?
The high LTM (or last twelve month) payout ratio of 69% (implying that it keeps only 31% of profits) for Genco Shipping & Trading suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, Genco Shipping & Trading has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 78%. Accordingly, forecasts suggest that Genco Shipping & Trading's future ROE will be 16% which is again, similar to the current ROE.
Summary
On the whole, we do feel that Genco Shipping & Trading has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company's growth could be higher, were it to pay out less dividends and retain more of its profits? That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here