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Could The Market Be Wrong About Golden Ocean Group Limited (NASDAQ:GOGL) Given Its Attractive Financial Prospects?

·4 min read

With its stock down 24% over the past three months, it is easy to disregard Golden Ocean Group (NASDAQ:GOGL). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Golden Ocean Group's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Golden Ocean Group

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 Golden Ocean Group is:

34% = US$629m ÷ US$1.9b (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.34 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Golden Ocean Group's Earnings Growth And 34% ROE

To begin with, Golden Ocean Group has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 29% also portrays the company's ROE in a good light. Given the circumstances, the significant 54% net income growth seen by Golden Ocean Group over the last five years is not surprising.

Next, on comparing Golden Ocean Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 64% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Golden Ocean Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Golden Ocean Group Using Its Retained Earnings Effectively?

Golden Ocean Group has a significant three-year median payout ratio of 81%, meaning the company only retains 19% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Golden Ocean Group is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 83%. Regardless, Golden Ocean Group's ROE is speculated to decline to 18% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Golden Ocean Group's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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