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Most readers would already be aware that Mermaid Maritime's (SGX:DU4) stock increased significantly by 52% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Mermaid Maritime's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Mermaid Maritime
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 Mermaid Maritime is:
5.9% = ฿346m ÷ ฿5.8b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
Mermaid Maritime's Earnings Growth And 5.9% ROE
On the face of it, Mermaid Maritime's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 5.9%, we may spare it some thought. Moreover, we are quite pleased to see that Mermaid Maritime's net income grew significantly at a rate of 31% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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 compared Mermaid Maritime's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 41% in the same 5-year period, which is a bit concerning.