Do finances play a role?

Westshore Terminals Investment (TSE:WTE) stock has risen 8.9% over the past three months. We wonder if and what role the company’s financials play in this price move, as a company’s long-term fundamentals typically dictate market performance. In this article, we decided to focus on Westshore Terminals Investment’s ROE.

Return on equity, or ROE, is a key measure used to assess how efficiently a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis on Westshore Terminals Investment

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 an investment in Westshore Terminals is:

13% = C$96 million ÷ C$740 million (Based on trailing twelve months to September 2023).

“Return” is the annual profit. One way to conceptualize this is that for every C$1 of shareholder equity it holds, the company makes C$0.13 in profit.

What does ROE have to do with revenue growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on how much of its earnings the company chooses to reinvest or “hold,” we can then estimate the company’s future ability to generate earnings. All else being equal, the higher the ROE and earnings retention, the higher the growth rate of a company compared to companies that do not necessarily carry these characteristics.

Side by side comparison of Westshore Terminals Investment’s earnings growth and 13% ROE

To begin with, Westshore Terminals Investment’s ROE looks acceptable. Even compared to the industry average of 14%, the company’s ROE looks pretty decent. As you might expect, the 10% drop in net income reported by Westshore Terminals Investment is a bit of a surprise. We think there may be some other factors that are hindering the growth of the company. For example, the company pays out a large portion of its earnings as dividends or faces competitive pressure.

So, as a next step, we compared the performance of Westshore Terminals Investment to the industry and were disappointed to find that while the company has been declining earnings, the industry has been growing at a rate of 22% over the past few years.

TSX: WTE Past Earnings Growth to December 30, 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to ascertain whether the expected growth or decline in profit, as the case may be, is included in the price. This will help them determine whether the future of the stock looks promising or ominous. Is Westshore Terminals Investment fairly valued compared to other companies? These 3 evaluation measures may help you decide.

Is Westshore Terminals Investment using its earnings effectively?

Westshore Terminals Investment has a high three-year average payout ratio of 61% (ie, it retains 39% of its earnings). This implies that the company pays out most of its earnings as dividends to its shareholders. That goes some way to explaining why his profits are shrinking. With only little reinvestment in the business, earnings growth will obviously be low or non-existent. You can see the two risks we identified for Westshore Terminals Investment by visiting our risk dashboard for free on our platform here.

In addition, Westshore Terminals Investment has paid dividends for at least ten years, which means that the company’s management is determined to pay dividends, even if it means little or no growth in earnings. Our latest analyst data shows that the company’s future payout ratio is expected to grow to 107% over the next three years.

Conclusion

Overall, we think Westshore Terminals Investment certainly has some positives to consider. Still, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could benefit from a high ROE if the company reinvested more of its earnings. As discussed earlier, the company retains a small portion of its earnings. Having said that, we have researched the latest analyst estimates and found that analysts expect the company’s revenue growth to improve slightly. Of course, this may bring some relief to shareholders. To learn more about the company’s future revenue growth projections, check this out Free of charge report analyst estimates for the company to learn more.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.

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