Yahoo Finance Hamburger Hafen und Logistik Aktiengesellschaft's (ETR:HHFA) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Hamburger Hafen und Logistik's (ETR:HHFA) stock is up by a considerable 43% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Hamburger Hafen und Logistik'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.
See our latest analysis for Hamburger Hafen und Logistik
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 Hamburger Hafen und Logistik is:
10% = €92m ÷ €881m (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 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.
Hamburger Hafen und Logistik's Earnings Growth And 10% ROE
To start with, Hamburger Hafen und Logistik's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. However, while Hamburger Hafen und Logistik has a pretty respectable ROE, its five year net income decline rate was 3.3% . So, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
With the industry earnings declining at a rate of 3.3% in the same period, we deduce that both the company and the industry are shrinking at the same rate.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hamburger Hafen und Logistik's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Hamburger Hafen und Logistik Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 61% (implying that 39% of the profits are retained), most of Hamburger Hafen und Logistik's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 4 risks we have identified for Hamburger Hafen und Logistik by visiting our risks dashboard for free on our platform here.
Moreover, Hamburger Hafen und Logistik has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 73% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Conclusion
In total, it does look like Hamburger Hafen und Logistik has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
