Select Water Solutions' Weak ROE Masked by Strong Earnings Growth

Select Water Solutions' stock is down 33% over the past three months, but its ROE of 4.5% is still decent. The formula for ROE is Net Profit (from continuing operations) ÷ Shareholders' Equity. The company's ROE is calculated as $41m ÷ $917m (trailing twelve months to March 2025). Despite a weak ROE, the company saw an exceptional 74% net income growth over the past five years, possibly due to strategic decisions or a low payout ratio.

Select Water Solutions (NYSE:WTTR) has seen its stock price drop by 33% over the past three months, which might lead investors to overlook the company. However, a closer examination of its key financial indicators reveals some positive aspects that could suggest long-term potential.

One of the critical metrics to consider for shareholders is Return on Equity (ROE), which measures the profitability of a company relative to shareholder's equity. For Select Water Solutions, the ROE is calculated as follows:
\[ \text{ROE} = \frac{\text{Net Profit}}{\text{Shareholders' Equity}} \]
\[ \text{ROE} = \frac{US\$41m}{US\$917m} = 4.5\% \]

While this ROE is relatively low compared to the industry average of 13%, it is not necessarily a deal-breaker. The company's exceptional 74% net income growth over the past five years suggests that there might be other factors at play, such as strategic decisions or a low payout ratio.

Select Water Solutions' three-year median payout ratio is 35%, indicating that the company retains 65% of its income, which it reinvests in its business. This high reinvestment rate could be a significant contributor to its impressive earnings growth. Furthermore, the company has consistently paid dividends over the past three years, demonstrating its commitment to sharing profits with shareholders.

Looking ahead, while the company's earnings growth is expected to slow down according to industry analysts, it is crucial to consider whether this forecast is based on broad industry expectations or specific to the company's fundamentals. The ROE is predicted to rise to 9.4% over the next three years, suggesting that the company's profitability will improve.

In conclusion, Select Water Solutions presents an interesting investment opportunity despite its current stock price decline. Its strong earnings growth and efficient reinvestment of profits make it a company worth monitoring for long-term investors.

References:
[1] https://finance.yahoo.com/news/weakness-select-water-solutions-inc-120736426.html