Nordic American Tankers Limited (NYSE:NAT) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?
Nordic American Tankers (NYSE:NAT) has had a great run on the share market with its stock up by a significant 32% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Nordic American Tankers' 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 Nordic American Tankers
How Do You Calculate Return On Equity?
Return on equity 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 Nordic American Tankers is:
2.8% = US$15m ÷ US$540m (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 in profit.
What Has ROE Got To Do With 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.
Nordic American Tankers' Earnings Growth And 2.8% ROE
As you can see, Nordic American Tankers' ROE looks pretty weak. Not just that, even compared to the industry average of 30%, the company's ROE is entirely unremarkable. Although, we can see that Nordic American Tankers saw a modest net income growth of 19% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing Nordic American Tankers' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% 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). This then helps them determine if the stock is placed for a bright or bleak future. Is NAT fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Nordic American Tankers Efficiently Re-investing Its Profits?
Nordic American Tankers' high LTM (or last twelve month) payout ratio of 334% suggests that the company is paying out more to its shareholders than what it is making. However, this hasn't really hampered its ability to grow as we saw earlier. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. You can see the 4 risks we have identified for Nordic American Tankers by visiting our risks dashboard for free on our platform here.
Besides, Nordic American Tankers has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 119% over the next three years.
Conclusion
Overall, we have mixed feelings about Nordic American Tankers. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
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