Is Star Bulk Carriers Corp.'s (NASDAQ:SBLK) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Star Bulk Carriers (NASDAQ:SBLK) has had a great run on the share market with its stock up by a significant 17% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Star Bulk Carriers' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Star Bulk Carriers
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Star Bulk Carriers is:
38% = US$780m ÷ US$2.1b (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.38 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. 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 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.
Star Bulk Carriers' Earnings Growth And 38% ROE
First thing first, we like that Star Bulk Carriers has an impressive ROE. Secondly, even when compared to the industry average of 27% the company's ROE is quite impressive. As a result, Star Bulk Carriers' exceptional 79% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Star Bulk Carriers' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 62% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Star Bulk Carriers fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Star Bulk Carriers Using Its Retained Earnings Effectively?
Star Bulk Carriers has a significant three-year median payout ratio of 66%, meaning the company only retains 34% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Besides, Star Bulk Carriers has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 82% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 25%, over the same period.
On the whole, we feel that Star Bulk Carriers' performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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