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Koninklijke Vopak (AMS:VPK) has had a rough week with its share price down 3.1%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Koninklijke Vopak'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Koninklijke Vopak
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 Koninklijke Vopak is:
14% = €437m ÷ €3.2b (Based on the trailing twelve months to September 2024).
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 €0.14 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.
Koninklijke Vopak's Earnings Growth And 14% ROE
To start with, Koninklijke Vopak's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. However, while Koninklijke Vopak has a pretty respectable ROE, its five year net income decline rate was 11% . We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.
However, when we compared Koninklijke Vopak's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 29% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for VPK? You can find out in our latest intrinsic value infographic research report.