November 30, 2021

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Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Drillcon’s (STO:DRIL) recent performance, when its stock has declined 34% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Drillcon’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Drillcon

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Drillcon is:

20% = kr35m ÷ kr176m (Based on the trailing twelve months to March 2020).

The ‘return’ refers to a company’s earnings over the last year. That means that for every SEK1 worth of shareholders’ equity, the company generated SEK0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Drillcon’s Earnings Growth And 20% ROE

Firstly, we acknowledge that Drillcon has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn’t go unnoticed by us. As a result, Drillcon’s exceptional 35% net income growth seen over the past five years, doesn’t come as a surprise.

As a next step, we compared Drillcon’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

OM:DRIL Past Earnings Growth May 15th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Drillcon fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Drillcon Using Its Retained Earnings Effectively?

Drillcon has a significant three-year median payout ratio of 60%, meaning the company only retains 40% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Summary

Overall, we are quite pleased with Drillcon’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph of Drillcon’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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