Is United Drilling Tools Limited's(NSE:UNIDT) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that United Drilling Tools' (NSE:UNIDT) stock increased significantly by 7.6% over the past month. 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 United Drilling Tools' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for United Drilling Tools

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 United Drilling Tools is:

21% = ₹382m ÷ ₹1.8b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.21 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

United Drilling Tools' Earnings Growth And 21% ROE

At first glance, United Drilling Tools seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Probably as a result of this, United Drilling Tools was able to see an impressive net income growth of 36% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing United Drilling Tools' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% in the same period.

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 United Drilling Tools fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is United Drilling Tools Using Its Retained Earnings Effectively?

United Drilling Tools has a really low three-year median payout ratio of 7.3%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like United Drilling Tools is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, United Drilling Tools has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that United Drilling Tools' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for United Drilling Tools by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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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