South Port New Zealand (NZSE:SPN) has had a rough month with its share price down 6.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study South Port New Zealand's ROE in this article.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for South Port New Zealand
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for South Port New Zealand is:
22% = NZ$12m ÷ NZ$55m (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.22 in profit.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
South Port New Zealand's Earnings Growth And 22% ROE
To begin with, South Port New Zealand seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.6%. This certainly adds some context to South Port New Zealand's decent 5.9% net income growth seen over the past five years.
We then performed a comparison between South Port New Zealand's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.9% in the same period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if South Port New Zealand is trading on a high P/E or a low P/E, relative to its industry.