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Do Fundamentals Have Any Role To Play In Driving Canadian Natural Resources Limited's (TSE:CNQ) Stock Up Recently?

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Canadian Natural Resources' (TSE:CNQ) stock is up by 8.8% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Canadian Natural 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.

View our latest analysis for Canadian Natural Resources

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Canadian Natural Resources is:

6.7% = CA$2.2b ÷ CA$33b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.07.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Canadian Natural Resources' Earnings Growth And 6.7% ROE

On the face of it, Canadian Natural Resources' ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 12%. Canadian Natural Resources was still able to see a decent net income growth of 20% over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Canadian Natural Resources' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. Is CNQ fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Canadian Natural Resources Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Canadian Natural Resources suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Canadian Natural Resources has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 49%. Still, forecasts suggest that Canadian Natural Resources' future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Canadian Natural Resources has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.

This article by Simply Wall St is general in nature. 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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