Most readers would already be aware that ConocoPhillips’ (NYSE:COP) stock increased significantly by 9.0% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study ConocoPhillips’ ROE in this article.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for ConocoPhillips
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for ConocoPhillips is:
22% = US$11b ÷ US$49b (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.22.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
ConocoPhillips’ Earnings Growth And 22% ROE
To begin with, ConocoPhillips seems to have a respectable ROE. Further, the company’s ROE is similar to the industry average of 21%. This certainly adds some context to ConocoPhillips’ exceptional 27% net income growth seen over the past five years. However, there could also be other drivers behind this growth. Such as – high earnings retention or an efficient management in place.
We then compared ConocoPhillips’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 36% in the same 5-year period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is COP worth today? The intrinsic value infographic in our free research report helps visualize whether COP is currently mispriced by the market.
Is ConocoPhillips Making Efficient Use Of Its Profits?
The three-year median payout ratio for ConocoPhillips is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like ConocoPhillips is reinvesting its earnings efficiently.
Besides, ConocoPhillips has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 45%. As a result, ConocoPhillips’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.
Summary
Overall, we are quite pleased with ConocoPhillips’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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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.