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Are NorAm Drilling AS' (OB:NORAM) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Simply Wall St · 04/09 04:22

With its stock down 22% over the past three months, it is easy to disregard NorAm Drilling (OB:NORAM). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study NorAm Drilling'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Do You 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 NorAm Drilling is:

3.8% = US$2.3m ÷ US$59m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.04 in profit.

View our latest analysis for NorAm Drilling

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

NorAm Drilling's Earnings Growth And 3.8% ROE

It is hard to argue that NorAm Drilling's ROE is much good in and of itself. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. In spite of this, NorAm Drilling was able to grow its net income considerably, at a rate of 45% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between NorAm Drilling's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 48% in the same 5-year period.

past-earnings-growth
OB:NORAM Past Earnings Growth April 9th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if NorAm Drilling is trading on a high P/E or a low P/E , relative to its industry.

Is NorAm Drilling Making Efficient Use Of Its Profits?

Summary

On the whole, we do feel that NorAm Drilling has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.