Declining Stock and Decent Financials: Is The Market Wrong About Westshore Terminals Investment Corporation (TSE:WTE)?

Westshore Terminals Investment (TSE:WTE) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Westshore Terminals Investment’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Westshore Terminals Investment

How To Calculate Return On Equity?

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:

14% = CA$105m ÷ CA$735m (Based on the trailing twelve months to June 2022).

The ‘return’ is the income the business earned over the last year. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.14 in profit.

Why Is ROE Important For 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. 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.

Westshore Terminals Investment’s Earnings Growth And 14% ROE

At first glance, Westshore Terminals Investment seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 15%. However, we are curious as to how Westshore Terminals Investment’s decent returns still resulted in flat growth for Westshore Terminals Investment in the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Westshore Terminals Investment’s reported growth was a little less than the industry growth of1.3% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 34% (meaning the company retains66% of profits) in the last three-year period, Westshore Terminals Investment’s earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Westshore Terminals Investment has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 132% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 8.6%, over the same period.

Conclusion

In total, it does look like Westshore Terminals Investment has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. In addition, on studying the latest analyst forecasts, we found that the company’s earnings are expected to continue to shrink. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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