Most readers already know that Cactus (NYSE:WHD) stock is up 6.4% over the past three months. We wonder if and what role company finances play in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on the ROE of Cactus.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
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How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Cactus is:
16% = $100 million ÷ $644 million (based on trailing 12 months to June 2022).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for each dollar of investment by its shareholder, the company generates a profit of $0.16.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently 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 better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Cactus earnings growth and ROE of 16%
For starters, Cactus seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 8.2%. Despite this, Cactus’ five-year net income growth has been fairly steady over the past five years. We believe there could be other factors at play here that limit the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
Next, we compared Cactus’ performance to that of the industry and found that the industry had reduced its profits by 4.6% over the same period, suggesting that the company’s profits had declined. at a slower pace than its industry. This offers shareholders some relief.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Cactus’ valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Cactus effectively reinvest its profits?
Despite a moderate three-year median payout ratio of 40% (meaning the company retains 60% of earnings) over the past three years, Cactus’ earnings growth has been more or less steady. So there could be another explanation for this. For example, the company’s business may deteriorate.
Additionally, Cactus has paid dividends over a three-year period, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 18% over the next three years. Thus, the expected decline in Cactus’ payout ratio explains the anticipated increase in the company’s future ROE to 24%, over the same period.
All in all, it seems that Cactus has positive aspects in its activity. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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