Yahoo Finance Is Westshore Terminals Investment Corporation's(TSE:WTE) Recent Stock Performance Tethered To Its Strong Fundamentals?
Westshore Terminals Investment's (TSE:WTE) stock is up by a considerable 20% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Westshore Terminals Investment's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Westshore Terminals Investment
How Is ROE Calculated?
ROE 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 Westshore Terminals Investment is:
15% = CA$117m ÷ CA$760m (Based on the trailing twelve months to June 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.15 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Westshore Terminals Investment's Earnings Growth And 15% ROE
To begin with, Westshore Terminals Investment seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. However, we are curious as to how the high returns still resulted in flat growth for Westshore Terminals Investment 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.
As a next step, we compared Westshore Terminals Investment's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 1.7% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Westshore Terminals Investment's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Westshore Terminals Investment Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 34% (implying that the company keeps 66% of its income) over the last three years, Westshore Terminals Investment has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
In addition, Westshore Terminals Investment has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 97% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 6.5%, over the same period.
Summary
In total, we are pretty happy with Westshore Terminals Investment's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.
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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