NexTier Oilfield Solutions Inc.'s (NYSE:NEX) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?
Most readers would already be aware that NexTier Oilfield Solutions' (NYSE:NEX) stock increased significantly by 11% over the past week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study NexTier Oilfield Solutions' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for NexTier Oilfield Solutions
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NexTier Oilfield Solutions is:
6.8% = US$44m ÷ US$644m (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax 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 $0.07 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of NexTier Oilfield Solutions' Earnings Growth And 6.8% ROE
When you first look at it, NexTier Oilfield Solutions' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.2%, so we won't completely dismiss the company. Having said that, NexTier Oilfield Solutions' five year net income decline rate was 18%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 4.6% in the same period, we found that NexTier Oilfield Solutions' performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
Earnings growth is an important metric to consider when valuing a stock. 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. One 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 prospects. So, you may want to check if NexTier Oilfield Solutions is trading on a high P/E or a low P/E, relative to its industry.
Is NexTier Oilfield Solutions Making Efficient Use Of Its Profits?
Because NexTier Oilfield Solutions doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Conclusion
On the whole, we feel that the performance shown by NexTier Oilfield Solutions can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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