Is ADNOC Drilling Company P.J.S.C.'s (ADX:ADNOCDRILL) Stock's Recent Performance A Reflection Of Its Financial Health?

ADNOC Drilling Company P.J.S.C's (ADX:ADNOCDRILL) stock up by 4.8% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on ADNOC Drilling Company P.J.S.C's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for ADNOC Drilling Company P.J.S.C

How Do You Calculate Return On Equity?

The formula for ROE is:

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:

32% = US$1.0b ÷ US$3.3b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every AED1 worth of shareholders' equity, the company generated AED0.32 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. 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 ADNOC Drilling Company P.J.S.C's Earnings Growth And 32% ROE

To start with, ADNOC Drilling Company P.J.S.C's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.8%. This certainly adds some context to ADNOC Drilling Company P.J.S.C's decent 11% net income growth seen 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 11% 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. Is ADNOC Drilling Company P.J.S.C fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ADNOC Drilling Company P.J.S.C Efficiently Re-investing Its Profits?

While ADNOC Drilling Company P.J.S.C has a three-year median payout ratio of 80% (which means it retains 20% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

While ADNOC Drilling Company P.J.S.C has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. 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 67%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 31%.

Summary

In total, we are pretty happy with ADNOC Drilling Company P.J.S.C's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.