Profit ratio

The fundamentals of Golden Ocean Group Limited (NASDAQ:GOGL) look quite solid: could the market be wrong about the stock?

With its stock down 28% in the past month, it’s easy to overlook Golden Ocean Group (NASDAQ:GOGL). However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. Specifically, we decided to study the ROE of Golden Ocean Group in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Golden Ocean Group

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Golden Ocean Group is:

34% = $629 million ÷ $1.9 billion (based on trailing 12 months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.34 in profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Golden Ocean Group’s earnings growth and 34% ROE

First of all, we appreciate the fact that Golden Ocean Group has an impressive ROE. Even compared to the industry average of 29%, the company’s ROE is pretty decent. As a result, Golden Ocean Group’s remarkable 54% net income growth observed over the past 5 years is likely aided by its high ROE.

Then, comparing with the industry net income growth, we found that Golden Ocean Group’s reported growth was lower than the industry growth of 68% over the same period, which we don’t don’t like to see.

NasdaqGS: GOGL Past Earnings Growth June 26, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Golden Ocean Group correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Golden Ocean Group effectively reinvest its profits?

Golden Ocean Group has a large three-year median payout ratio of 81%, which means the company retains only 19% of its revenue. This implies that the company has been able to achieve high earnings growth despite returning most of its earnings to shareholders.

Additionally, Golden Ocean Group has paid dividends over a seven-year period, which means the company is pretty serious about sharing its profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 72% of its earnings over the next three years. However, Golden Ocean Group’s future ROE is expected to decline to 19% despite little change expected in the company’s payout ratio.

Conclusion

Overall, we think Golden Ocean Group certainly has some positive factors to consider. The company moderately increased its earnings, as previously reported. Still, the high ROE could have been even more beneficial to investors had the company reinvested more of its earnings. As pointed out earlier, the current reinvestment rate seems quite low. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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.