It’s hard to get excited when looking at the recent performance of ConocoPhillips (NYSE:COP), where the stock has fallen 8.1% over the past three months. However, a closer look at the solid financials might make you reconsider. Given that fundamentals typically drive long-term market outcomes, the company is worth a look. Specifically, we decided to examine ConocoPhillips’ ROE in this article.
Return on equity or ROE is an important factor that a shareholder must consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on capital provided by the company’s shareholders.
Check out our latest analysis for ConocoPhillips
How do you calculate return on equity?
The Formula for ROE Is:
Return on equity = net profit (from continuing operations) ÷ equity
So, based on the above formula, the ROE for ConocoPhillips is:
23% = $11 billion ÷ $48 billion (Based on trailing twelve months ending September 2023).
The “return” is the profit over the last twelve months. Another way to think of it is that for every dollar of equity, the company was able to generate a profit of $0.23.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Based on how much of its profits the company reinvests or “retains”, we can then evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate will be compared to companies that don’t necessarily share these characteristics.
A Side-by-Side Comparison of ConocoPhillips’ Earnings Growth and ROE of 23%
First, we recognize that ConocoPhillips has a significantly high ROE. Furthermore, a comparison with the average industry ROE of 23% also presents the company’s ROE in a good light. Therefore, it may not be wrong to say that the impressive five-year net income growth of 27% that ConocoPhillips posted is likely is due to the high ROE.
As a next step, we compared ConocoPhillips’ net income growth to that of the industry and found that the company has a similar growth number when compared to the industry’s average growth rate of 33% over the same period.
The basis for a company’s valuation depends to a large extent on earnings growth. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This allows them to determine whether the stock’s future looks promising or threatening. Is COP assessed fairly? This infographic on the intrinsic value of the company contains everything you need to know.
Is ConocoPhillips using its retained earnings effectively?
The three-year median payout ratio for ConocoPhillips is 31%, which is moderately low. The company retains the remaining 69%. This suggests that the dividend is well covered, and given the high growth we discussed above, it looks like ConocoPhillips is reinvesting its profits efficiently.
Furthermore, ConocoPhillips is committed to continuing to share its profits with shareholders, as we can infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 29%. Accordingly, forecasts suggest that ConocoPhillips’ future ROE will be 21%, which in turn is in line with current ROE.
Overall, we are very satisfied with ConocoPhillips’ performance. We particularly like that the company reinvests heavily in its business, with a high return. Unsurprisingly, this has led to impressive earnings growth. However, when examining current analyst estimates, we were concerned that while the company has grown its profits in the past, analysts expect its profits to decline in the future. To know more about the company’s future earnings growth projections, check out here free Check out analyst forecasts for the company to find out more.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.