Yahoo Finance Braemar Shipping Services Plc's (LON:BMS) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Most readers would already be aware that Braemar Shipping Services' (LON:BMS) stock increased significantly by 51% 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. Specifically, we decided to study Braemar Shipping Services' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Braemar Shipping Services
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Braemar Shipping Services is:
15% = UK£8.9m ÷ UK£59m (Based on the trailing twelve months to August 2020).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.15 in profit.
Why Is ROE Important For 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.
Braemar Shipping Services' Earnings Growth And 15% ROE
At first glance, Braemar Shipping Services seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.3%. As you might expect, the 12% net income decline reported by Braemar Shipping Services is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
However, when we compared Braemar Shipping Services' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.5% 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 Braemar Shipping Services is trading on a high P/E or a low P/E, relative to its industry.
Is Braemar Shipping Services Efficiently Re-investing Its Profits?
Braemar Shipping Services doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Conclusion
On the whole, we do feel that Braemar Shipping Services has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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