Is the mixed finances of the state-owned joint-stock company Novorossiysk Commercial Sea Port (MCX: NMTP) the reason for its dismal performance in the stock market?

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With its stock down 11% over the past month, it’s easy to overlook the Novorossiysk Commercial Seaport (MCX: NMTP). We did, however, decide to study the company’s financial statements to determine if they had anything to do with falling prices. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In this article, we decided to focus on the ROE of the commercial seaport of Novorossiysk.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for Novorossiysk Commercial Seaport

How is the ROE calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE of the commercial seaport of Novorossiysk is:

12% = US $ 152 million ÷ US $ 1.3 billion (based on the last twelve months to June 2021).

The “return” is the income the business has earned over the past year. This therefore means that for each RUB1 of the investments of its shareholder, the company generates a profit of RUB0.12.

What does ROE have to do with profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Novorossiysk Commercial Sea Port profit growth and 12% ROE

At first glance, the ROE of Novorossiysk Commercial Sea Port does not look very promising. Still, further study shows that the company’s ROE is similar to the industry average of 9.8%. However, the rate of decline in net income of Novorossiysk Commercial Sea Port over five years was 3.0%. Keep in mind that the business has a slightly low ROE. Therefore, this partly explains the drop in income.

So, in the next step, we compared the performance of Novorossiysk commercial seaport to that of the industry and were disappointed to find that although the company reduced its profits, the industry increased its profits to a rate of 1.9% over the same period.

MISX: NMTP Past Profit Growth October 10, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. What is NMTP worth today? The intrinsic value infographic in our free research report helps to visualize whether NMTP is currently poorly valued by the market.

Is Novorossiysk Commercial Seaport Efficiently Reinvesting Profits?

Despite a normal three-year median payout ratio of 42% (where it retains 58% of its profits), the commercial seaport of Novorossiysk has seen its profits decline as we have seen above. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

In addition, Novorossiysk Commercial Sea Port has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over profit growth.

Summary

All in all, we are a little ambivalent about the performance of the Novorossiysk commercial seaport. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. Our risk dashboard would contain the 2 risks that we have identified for the commercial seaport of Novorossiysk.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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