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Marsden Maritime Holdings’ (NZSE:MMH) stock up by 4.2% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company’s financials don’t look very promising. Particularly, we will be paying attention to Marsden Maritime Holdings’ ROE today.
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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Marsden Maritime Holdings
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 Marsden Maritime Holdings is:
2.8% = NZ$4.5m ÷ NZ$157m (Based on the trailing twelve months to June 2024).
The ‘return’ is the yearly profit. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.03 in profit.
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.
It is quite clear that Marsden Maritime Holdings’ ROE is rather low. Even compared to the average industry ROE of 4.2%, the company’s ROE is quite dismal. Given the circumstances, the significant decline in net income by 3.0% seen by Marsden Maritime Holdings over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
However, when we compared Marsden Maritime Holdings’ growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 0.4% 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. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Marsden Maritime Holdings is trading on a high P/E or a low P/E, relative to its industry.