The shares of PHX Energy Services Corp. (TSE: PHX) recently showed weakness, but financial data looks strong: Should potential shareholders take the plunge?
PHX Energy Services (TSE: PHX) had a difficult month with its share price down 16%. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. Specifically, we have decided to study the ROE of PHX Energy Services in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for PHX Energy Services
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of PHX Energy Services is:
12% = C $ 16 million Ã· C $ 133 million (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every CA $ 1 invested by its shareholder, the company generates a profit of CA $ 0.12.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or âkeepâ, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
PHX Energy Services profit growth and 12% ROE
For starters, the ROE of PHX Energy Services seems acceptable. Even compared to the industry average of 13%, the company’s ROE looks pretty decent. This certainly adds context to the exceptional 57% net profit growth of PHX Energy Services observed over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, the business has a low payout ratio or is managed efficiently.
Next, comparing with the industry’s net income growth, we found that the growth figure reported by PHX Energy Services compares quite favorably with the industry average, which shows a 1.9% decline in the year. during the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering how PHX Energy Services is valued, check out this gauge of its price / earnings ratio, relative to its industry.
Is PHX Energy Services Efficiently Using Its Retained Earnings?
PHX Energy Services has a three-year median payout ratio of 38% (where it keeps 62% of its revenue), which is neither too low nor too high. At first glance, the dividend is well hedged and PHX Energy Services is effectively reinvesting its profits as evidenced by its exceptional growth which we discussed above.
In addition, PHX Energy Services is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 29% over the next three years. The fact that the company’s ROE should reach 20% over the same period is explained by the drop in the payout rate.
Overall, we believe that the performance of PHX Energy Services is quite good. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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