Are Worley Limited's (ASX:WOR) Mixed Financials Driving The Negative Sentiment?

By
Simply Wall St
Published
November 17, 2021
ASX:WOR
Source: Shutterstock

With its stock down 10% over the past three months, it is easy to disregard Worley (ASX:WOR). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Worley'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Worley

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Worley is:

1.5% = AU$85m ÷ AU$5.6b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.02 in profit.

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 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 Worley's Earnings Growth And 1.5% ROE

As you can see, Worley's ROE looks pretty weak. Even when compared to the industry average of 8.9%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Worley grew its net income at a significant rate of 31% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Worley's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 31% in the same period.

past-earnings-growth
ASX:WOR Past Earnings Growth November 18th 2021

Earnings growth is a huge factor in stock valuation. 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 WOR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Worley Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 110% for Worley 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. Having said that, the high payout ratio is definitely risky and something to keep an eye on. To know the 3 risks we have identified for Worley visit our risks dashboard for free.

Besides, Worley has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 70% over the next three years. The fact that the company's ROE is expected to rise to 7.6% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we have mixed feelings about Worley. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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