United Drilling Tools (NSE: UNIDT) shares have risen 44% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of United Drilling Tools.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for United Drilling Tools
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 for United Drilling Tools is:
21% = 460 m 2.2 b (based on the last twelve months up to September 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every 1 of social capital it has, the business has made 0.21 profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
United Drilling Tools profit growth and 21% ROE
At first glance, United Drilling Tools appears to have a decent ROE. Compared to the industry’s average ROE of 14%, the company’s ROE looks quite remarkable. This likely laid the foundation for United Drilling Tools’ significant 25% net profit growth seen over the past five years. We believe there could be other factors at play here as well. For example, the business has a low payout ratio or is managed efficiently.
We then performed a comparison between United Drilling Tools net income growth with industry, which found that the growth of the company is similar to the industry average growth of 25% over the same period. .
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether United Drilling Tools is trading high P / E or low P / E, relative to its industry.
Are United Drilling Tools Using Retained Profits Efficiently?
United Drilling Tools has a very low three-year median payout rate of 9.1%, meaning they have the remaining 91% to reinvest in their business. So it appears that management is reinvesting the profits massively to grow their business, which is reflected in their profit growth figure.
In addition, United Drilling Tools is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of five years of paying dividends.
Overall, we are very satisfied with the performance of United Drilling Tools. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that trading risk is also one of the factors that affect the price of the stock. So this is also an important area that investors should pay attention to before making a decision on a business. Our risk dashboard would contain the 2 risks we identified for United Drilling Tools.
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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 any stock 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.