Are Patterson-UTI Energy, Inc.'s (NASDAQ:PTEN) Mixed Financials Driving The Negative Sentiment?
Patterson-UTI Energy (NASDAQ:PTEN) has had a rough three months with its share price down 26%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Patterson-UTI Energy
How To 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 Patterson-UTI Energy is:
9.3% = US$155m ÷ US$1.7b (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.09 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Patterson-UTI Energy's Earnings Growth And 9.3% ROE
At first glance, Patterson-UTI Energy's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.3%, so we won't completely dismiss the company. But Patterson-UTI Energy saw a five year net income decline of 17% over the past five years. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 3.8% in the same period, we found that Patterson-UTI Energy's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Patterson-UTI Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Patterson-UTI Energy Efficiently Re-investing Its Profits?
Despite having a normal LTM (or last twelve month) payout ratio of 28% (where it is retaining 72% of its profits), Patterson-UTI Energy has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Patterson-UTI Energy has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 13% 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 17%, over the same period.
Overall, we have mixed feelings about Patterson-UTI Energy. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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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