U.S. Markets closed

Is Continental Resources, Inc.'s (NYSE:CLR) Latest Stock Performance A Reflection Of Its Financial Health?

·4 min read

Continental Resources (NYSE:CLR) has had a great run on the share market with its stock up by a significant 32% over the last 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 Continental Resources' 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.

See our latest analysis for Continental Resources

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 Continental Resources is:

24% = US$2.0b ÷ US$8.3b (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.24 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Continental Resources' Earnings Growth And 24% ROE

Firstly, we acknowledge that Continental Resources has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. Probably as a result of this, Continental Resources was able to see a decent net income growth of 9.1% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Continental Resources compares quite favourably to the industry average, which shows a decline of 7.1% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Continental Resources is trading on a high P/E or a low P/E, relative to its industry.

Is Continental Resources Making Efficient Use Of Its Profits?

Continental Resources has a low three-year median payout ratio of 5.8%, meaning that the company retains the remaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Continental Resources has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 14% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 17%, over the same period.

Summary

Overall, we are quite pleased with Continental Resources' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.