TechnipFMC plc (NYSE:FTI) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?
TechnipFMC's (NYSE:FTI) stock is up by a considerable 26% over the past month. 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. In this article, we decided to focus on TechnipFMC'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for TechnipFMC
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for TechnipFMC is:
0.6% = US$19m ÷ US$3.2b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.01.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
TechnipFMC's Earnings Growth And 0.6% ROE
It is hard to argue that TechnipFMC's ROE is much good in and of itself. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. Despite this, surprisingly, TechnipFMC saw an exceptional 51% 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. Such as - high earnings retention or an efficient management in place.
As a next step, we compared TechnipFMC'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 34%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is FTI fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is TechnipFMC Efficiently Re-investing Its Profits?
The really high LTM (or last twelve month) payout ratio of 192% for TechnipFMC suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk.
Additionally, TechnipFMC has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 19% over the next three years. The fact that the company's ROE is expected to rise to 22% over the same period is explained by the drop in the payout ratio.
Summary
On the whole, we feel that the performance shown by TechnipFMC can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
