Is Marco Polo Marine Ltd.'s (SGX:5LY) Recent Performance Tethered To Its Attractive Financial Prospects?

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

Wed, Dec 25, 2024, 9:54 PM 4 min read

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 Marco Polo Marine is:

12% = S$24m ÷ S$201m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.12 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. 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.

A Side By Side comparison of Marco Polo Marine's Earnings Growth And 12% ROE

To begin with, Marco Polo Marine seems to have a respectable ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. This probably goes some way in explaining Marco Polo Marine's significant 49% net income growth over the past five years amongst other factors. 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.

Next, on comparing with the industry net income growth, we found that Marco Polo Marine's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

past-earnings-growth — SGX:5LY Past Earnings Growth December 26th 2024

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Marco Polo Marine is trading on a high P/E or a low P/E, relative to its industry.

Is Marco Polo Marine Making Efficient Use Of Its Profits?

Marco Polo Marine's three-year median payout ratio to shareholders is 15%, which is quite low. This implies that the company is retaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Marco Polo Marine 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 10.0% over the next three years. As a result, the expected drop in Marco Polo Marine's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.

Conclusion

On the whole, we feel that Marco Polo Marine's performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.