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With its stock down 22% over the past month, it is easy to disregard Valaris (NYSE:VAL). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Valaris' ROE.
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.
See our latest analysis for Valaris
How To Calculate Return On Equity?
Return on equity 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 Valaris is:
47% = US$1.0b ÷ US$2.2b (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.47 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Valaris' Earnings Growth And 47% ROE
First thing first, we like that Valaris has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. So, the substantial 38% net income growth seen by Valaris over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Valaris' reported growth was lower than the industry growth of 48% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Valaris fairly valued compared to other companies? These 3 valuation measures might help you decide.