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Highlights
- Worley's return on equity remains below industry average.
- High payout ratio limits reinvestment potential.
- Earnings growth could slow based on current forecasts.
Worley Limited (ASX:WOR), a global engineering services company, has seen its stock decline nearly 17% over the past month, drawing attention to its financial performance and longer-term growth prospects. While short-term market movement often reflects sentiment, long-term value typically follows fundamentals — and Worley’s recent metrics are prompting deeper scrutiny.
A key metric under the spotlight is the company’s return on equity (ROE), which stands at 6.8% based on the last twelve months to December 2024. ROE measures how efficiently a company generates profit using shareholder capital. For context, this figure means Worley produces just A$0.07 in profit for every A$1 of equity — a performance that falls well short of the broader industry average of around 15%.
Despite a modest ROE, Worley has managed to grow its net income by about 20% over the past five years. This raises the possibility that other operational strengths or cost efficiencies may be supporting earnings growth. However, the comparatively low ROE does cast doubt on whether such growth is sustainable without stronger reinvestment returns.
The company’s capital allocation approach further adds to the mixed outlook. Worley has maintained a high payout ratio, returning 152% of its net earnings to shareholders in recent years. This suggests the company is distributing more than it earns, which may limit its ability to reinvest and compound future growth. Encouragingly, forward estimates point to a potential drop in the payout ratio to 59% over the next three years, which could free up more capital for growth initiatives. Correspondingly, ROE is forecast to rise to 9.5% — a potential signal of improved capital efficiency.
Long-term value creation often hinges on a company’s ability to reinvest profits at attractive returns. In Worley's case, limited reinvestment and modest ROE may challenge the continuation of past earnings momentum. While the company has demonstrated resilience and consistent dividend payments over the past decade, questions remain about whether future growth can keep pace with investor expectations.
As a result, while Worley (WOR) has delivered some strong earnings growth, its underlying financials raise valid concerns about how well that performance can be sustained in the current environment.
