Major Drilling Group International Inc.'s (TSE:MDI) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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Major Drilling Group International (TSE:MDI) has had a rough three months with its share price down 8.0%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Major Drilling Group International’s 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Major Drilling Group International

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Major Drilling Group International is:

8.2% = CA$26m ÷ CA$321m (Based on the trailing twelve months to October 2021).

The ‘return’ is the profit over the last twelve months. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Major Drilling Group International’s Earnings Growth And 8.2% ROE

At first glance, Major Drilling Group International’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 14% either. Although, we can see that Major Drilling Group International saw a modest net income growth of 15% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Major Drilling Group International’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 28% in the same period, which is a bit concerning.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Major Drilling Group International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Major Drilling Group International Using Its Retained Earnings Effectively?

Major Drilling Group International doesn’t pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

Overall, we feel that Major Drilling Group International certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company’s high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.