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With its stock down 5.6% over the past month, it is easy to disregard Hamburger Hafen und Logistik (ETR:HHFA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Hamburger Hafen und Logistik'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out 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:
18% = €139m ÷ €786m (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.18.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Hamburger Hafen und Logistik's Earnings Growth And 18% ROE
To start with, Hamburger Hafen und Logistik's ROE looks acceptable. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. Given the circumstances, we can't help but wonder why Hamburger Hafen und Logistik saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 2.1% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Hamburger Hafen und Logistik is trading on a high P/E or a low P/E, relative to its industry.