Most readers will already know that shares of Navigator Company (ELI:NVG) have risen a significant 14% over the past month. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on Navigator Company’s ROE.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Navigator Company

How to calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Navigator Company is:

16% = €171M ÷ €1.0B (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.16 euro.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

A side-by-side comparison of Navigator Company’s earnings growth and 16% ROE

At first glance, Navigator Company seems to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 13%. As you might expect, the 14% drop in net income reported by Navigator Company is a bit of a surprise. We believe there could be other factors at play here that are preventing the company from growing. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

That being said, we compared the performance of Navigator Company with that of the industry and became concerned when we saw that while the company had reduced its profits, the industry had increased its profits at a rate of 9, 0% over the same period.

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Are LVNs correctly valued? This intrinsic business value infographic has everything you need to know.

Does Navigator Company reinvest profits effectively?

Navigator Company’s earnings decline is not surprising given that the company spends the bulk of its earnings on paying dividends, judging by its three-year median payout ratio of 91% (or a 8.8% retention). With very little left to reinvest in the business, earnings growth is far from likely. Our risk dashboard should have the 2 risks we identified for Navigator Company.

Additionally, Navigator Company has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. business. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 91%. As a result, Navigator Company’s ROE is not expected to change much either, which we inferred from analysts’ estimate of 14% for future ROE.

Conclusion

Overall, we have mixed feelings about Navigator Company. Despite the high ROE, the company did not see any growth in earnings as it paid out most of its earnings in the form of dividends, with almost nothing to invest in its own business. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.