ADNOC Drilling Company P.J.S.C.'s (ADX:ADNOCDRILL) Stock Is Going Strong: Is the Market Following Fundamentals?

ADNOC Drilling Company P.J.S.C (ADX:ADNOCDRILL) has had a great run on the share market with its stock up by a significant 18% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to ADNOC Drilling Company P.J.S.C'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 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 ADNOC Drilling Company P.J.S.C

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 ADNOC Drilling Company P.J.S.C is:

36% = US$1.2b ÷ US$3.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every AED1 of its shareholder's investments, the company generates a profit of AED0.36.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

ADNOC Drilling Company P.J.S.C's Earnings Growth And 36% ROE

First thing first, we like that ADNOC Drilling Company P.J.S.C has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.7% also doesn't go unnoticed by us. This likely paved the way for the modest 20% net income growth seen by ADNOC Drilling Company P.J.S.C over the past five years.

As a next step, we compared ADNOC Drilling Company P.J.S.C's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.

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. 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 ADNOC Drilling Company P.J.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is ADNOC Drilling Company P.J.S.C Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 72% (or a retention ratio of 28%) for ADNOC Drilling Company P.J.S.C suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, ADNOC Drilling Company P.J.S.C has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 70%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 31%.

Conclusion

On the whole, we feel that ADNOC Drilling Company P.J.S.C's performance has been quite good. 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. 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.