In This Article:
Hapag-Lloyd (ETR:HLAG) has had a rough three months with its share price down 37%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Hapag-Lloyd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Hapag-Lloyd
How Is ROE Calculated?
ROE 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 Hapag-Lloyd is:
50% = €15b ÷ €29b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.50.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Hapag-Lloyd's Earnings Growth And 50% ROE
Firstly, we acknowledge that Hapag-Lloyd has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 23% which is quite remarkable. Under the circumstances, Hapag-Lloyd's considerable five year net income growth of 76% was to be expected.
As a next step, we compared Hapag-Lloyd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 64% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Hapag-Lloyd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.