Coterra Energy (NYSE:CTRA) has had a great run on the share market with its stock up by a significant 10% over the last week. 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. Particularly, we will be paying attention to Coterra Energy's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Coterra Energy is:
32% = US$4.1b ÷ US$13b (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.32 in profit.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Coterra Energy's Earnings Growth And 32% ROE
To begin with, Coterra Energy has a pretty high ROE which is interesting. Even when compared to the industry average of 31% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 56% net income growth seen by Coterra Energy was probably achieved as a result of the high ROE.
Next, on comparing with the industry net income growth, we found that Coterra Energy's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is CTRA worth today? The intrinsic value infographic in our free research report helps visualize whether CTRA is currently mispriced by the market.
Is Coterra Energy Efficiently Re-investing Its Profits?
The three-year median payout ratio for Coterra Energy is 48%, which is moderately low. The company is retaining the remaining 52%. By the looks of it, the dividend is well covered and Coterra Energy is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Coterra Energy 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 56%. Still, forecasts suggest that Coterra Energy's future ROE will drop to 20% even though the the company's payout ratio is not expected to change by much.
Overall, we are quite pleased with Coterra Energy's 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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