Most readers already know that Baker Hughes ( NASDAQ:BKR ) stock rose 4.3% last month. Since the market often pays for a company’s long-term financial health, we decided to study a company’s fundamentals to see if they could influence the market. In this article, we decided to focus on Baker Hughes’ ROE.
ROE, or return on equity, is a useful tool for evaluating how effectively a company is generating a return on its investment from shareholders. In other words, it is the profitability ratio that measures the capital provided by the company’s shareholders.
Check out our latest analysis of Baker Hughes
How do you calculate return on equity?
of The formula for return on equity is it –
Return on equity = net profit (from continuing operations) ÷ stockholders’ equity
Therefore, according to the formula above, the ROE for Baker Hughes is:
11% = US$1.7b ÷ US$15b (based on twelve months to September 2023).
‘Return’ refers to the company’s earnings in the previous year. Therefore, this means that for every share of shareholder’s investment, the company earns a profit of $0.11.
What does ROE have to do with earnings growth?
So far, we’ve learned that ROE measures how efficiently a company generates profits. By determining how much of these profits the company reinvests or “retains” and how effectively it does so, we can assess the company’s earnings growth potential. All things being equal, companies with high return on equity and high profit retention tend to have high growth rates compared to companies without the same characteristics.
Baker Hughes revenue growth and 11% ROE side by side comparison
At first glance, Baker Hughes appears to have a good ROE. And comparing with the industry, we found that the average industry ROE is the same at 13%. This probably goes some way to explaining, among other things, Baker Hughes’ high net income growth of 26 percent over the past five years. We suspect there may be other reasons here. For example, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Baker Hughes’ net income growth to the industry, and found that the company had a similar growth rate compared to the industry average growth of 24 percent over the same period.
The basis for attaching value to the company is highly correlated with revenue growth. The investor should try to ensure that the expected growth or decline in income, as the case may be, is priced in. Doing so will help them determine if the stock’s future is promising or bleak. Is the market worth BKR’s future outlook? You can find out in our latest Intrinsic Value Data Research report.
Is Baker Hughes using its profits efficiently?
Baker Hughes’ LTM (or trailing twelve month) payout ratio is a very modest 46%, meaning the company accounts for 54% of its earnings. By the looks of it, the dividend is well covered, and Baker Hughes is effectively reinvesting its profits, as evidenced by its exceptional growth above.
In addition, Baker Hughes has been paying dividends for six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s forward payout ratio is expected to decline to 32% over the next three years. A decline in the payout ratio is explained as the company’s ROE is expected to grow to 15% over the same period.
Overall, we were very pleased with Baker Hughes’ performance. In particular, we like that the company is reinvesting into the business and is on a high revenue trajectory. Unsurprisingly, this has resulted in a remarkable increase in income. Having said that, the latest industry analyst forecasts show that the company’s revenue growth will slow. Are these analysts’ expectations on the broader outlook for the industry or on the company’s fundamentals? Click here to be taken to our analyst forecast page for the company.
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