Advertisement
Singapore markets closed
  • Straits Times Index

    3,447.56
    -23.60 (-0.68%)
     
  • Nikkei

    40,063.79
    -62.56 (-0.16%)
     
  • Hang Seng

    17,417.68
    -360.73 (-2.03%)
     
  • FTSE 100

    8,155.72
    -49.17 (-0.60%)
     
  • Bitcoin USD

    66,539.77
    +2,769.52 (+4.34%)
     
  • CMC Crypto 200

    1,375.29
    +44.39 (+3.33%)
     
  • S&P 500

    5,505.00
    -39.59 (-0.71%)
     
  • Dow

    40,287.53
    -377.49 (-0.93%)
     
  • Nasdaq

    17,726.94
    -144.28 (-0.81%)
     
  • Gold

    2,402.80
    -53.60 (-2.18%)
     
  • Crude Oil

    80.25
    -2.57 (-3.10%)
     
  • 10-Yr Bond

    4.2390
    +0.0500 (+1.19%)
     
  • FTSE Bursa Malaysia

    1,636.55
    +2.74 (+0.17%)
     
  • Jakarta Composite Index

    7,294.50
    -26.58 (-0.36%)
     
  • PSE Index

    6,791.69
    +86.68 (+1.29%)
     

Nordic Group Limited's (SGX:MR7) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Nordic Group (SGX:MR7) has had a rough three months with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Nordic Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Nordic Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

14% = S$16m ÷ S$117m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Nordic Group's Earnings Growth And 14% ROE

At first glance, Nordic Group seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to Nordic Group's exceptional 22% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Nordic Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% over the last few years.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Nordic Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nordic Group Efficiently Re-investing Its Profits?

Nordic Group has a three-year median payout ratio of 39% (where it is retaining 61% of its income) which is not too low or not too high. So it seems that Nordic Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Nordic Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Nordic Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 3 risks we have identified for Nordic Group visit our risks dashboard for free.

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.