Yahoo Finance Patterson-UTI Energy, Inc. (NASDAQ:PTEN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Patterson-UTI Energy (NASDAQ:PTEN) has had a rough three months with its share price down 11%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Patterson-UTI Energy's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Patterson-UTI Energy
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 Patterson-UTI Energy is:
4.2% = US$198m ÷ US$4.8b (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.04 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Patterson-UTI Energy's Earnings Growth And 4.2% ROE
As you can see, Patterson-UTI Energy's ROE looks pretty weak. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. Despite this, surprisingly, Patterson-UTI Energy saw an exceptional 41% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between Patterson-UTI Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 45% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Patterson-UTI Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Patterson-UTI Energy Using Its Retained Earnings Effectively?
The high LTM (or last twelve month) payout ratio of 53% (implying that it keeps only 47% of profits) for Patterson-UTI Energy suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, Patterson-UTI Energy is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 29% over the next three years. As a result, the expected drop in Patterson-UTI Energy's payout ratio explains the anticipated rise in the company's future ROE to 7.6%, over the same period.
Summary
In total, it does look like Patterson-UTI Energy has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
