Most readers would already be aware that Braemar Shipping Services’ (LON:BMS) stock increased significantly by 15% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Braemar Shipping Services’ ROE in this article.
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.
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 Braemar Shipping Services is:
17% = UK£11m ÷ UK£68m (Based on the trailing twelve months to August 2021).
The ‘return’ is the income the business earned over the last year. That means that for every £1 worth of shareholders’ equity, the company generated £0.17 in profit.
What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Braemar Shipping Services’ Earnings Growth And 17% ROE
To begin with, Braemar Shipping Services seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 10.0%. This probably laid the ground for Braemar Shipping Services’ significant 51% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Braemar Shipping Services’ growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for BMS? You can find out in our latest intrinsic value infographic research report.
Is Braemar Shipping Services Making Efficient Use Of Its Profits?
Braemar Shipping Services’ ‘ LTM (or last twelve month) payout ratio is on the lower side at 19% implying that it is retaining a higher percentage (81%) of its profits. So it looks like Braemar Shipping Services is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Braemar Shipping Services is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 27% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 11%, over the same period.
In total, we are pretty happy with Braemar Shipping Services’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.