Are First Ship Lease Trust's (SGX:D8DU) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Sep 8, 2024, 10:06 PM 4 min read

It is hard to get excited after looking at First Ship Lease Trust's (SGX:D8DU) recent performance, when its stock has declined 9.3% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study First Ship Lease Trust's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for First Ship Lease Trust

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for First Ship Lease Trust is:

11% = US$3.2m ÷ US$30m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

First Ship Lease Trust's Earnings Growth And 11% ROE

At first glance, First Ship Lease Trust seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.8%. This certainly adds some context to First Ship Lease Trust's exceptional 21% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between First Ship Lease Trust's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same 5-year period.

past-earnings-growth — SGX:D8DU Past Earnings Growth September 9th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. Is First Ship Lease Trust fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is First Ship Lease Trust Using Its Retained Earnings Effectively?

The really high LTM (or last twelve month) payout ratio of 822% for First Ship Lease Trust suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 3 risks we have identified for First Ship Lease Trust.

Moreover, First Ship Lease Trust is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

Overall, we feel that First Ship Lease Trust certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of First Ship Lease Trust's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.