Yahoo Finance Has Solaris Oilfield Infrastructure, Inc.'s (NYSE:SOI) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Most readers would already be aware that Solaris Oilfield Infrastructure's (NYSE:SOI) stock increased significantly by 16% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Solaris Oilfield Infrastructure's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Solaris Oilfield Infrastructure
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Solaris Oilfield Infrastructure is:
11% = US$34m ÷ US$310m (Based on the trailing twelve months to March 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Solaris Oilfield Infrastructure's Earnings Growth And 11% ROE
To start with, Solaris Oilfield Infrastructure's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 13%. However, while Solaris Oilfield Infrastructure has a pretty respectable ROE, its five year net income decline rate was 12% . Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
However, when we compared Solaris Oilfield Infrastructure's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 45% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Solaris Oilfield Infrastructure's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Solaris Oilfield Infrastructure Using Its Retained Earnings Effectively?
Solaris Oilfield Infrastructure's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 56% (or a retention ratio of 44%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 2 risks we have identified for Solaris Oilfield Infrastructure by visiting our risks dashboard for free on our platform here.
Additionally, Solaris Oilfield Infrastructure has paid dividends over a period of five years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.
Summary
On the whole, we do feel that Solaris Oilfield Infrastructure has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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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.
