Is Weakness In Canadian Natural Resources Limited (TSE:CNQ) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
Canadian Natural Resources (TSE:CNQ) has had a rough three months with its share price down 8.5%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Canadian Natural Resources' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Canadian Natural Resources
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 Canadian Natural Resources is:
25% = CA$9.6b ÷ CA$39b (Based on the trailing twelve months to March 2023).
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$0.25.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 25% ROE
To begin with, Canadian Natural Resources has a pretty high ROE which is interesting. Even when compared to the industry average of 24% the company's ROE is pretty decent. As a result, Canadian Natural Resources' remarkable 33% net income growth seen over the past 5 years is likely aided by its high ROE.
As a next step, we compared Canadian Natural Resources' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 40% in the same period.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CNQ worth today? The intrinsic value infographic in our free research report helps visualize whether CNQ is currently mispriced by the market.
Is Canadian Natural Resources Using Its Retained Earnings Effectively?
Canadian Natural Resources' three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. By the looks of it, the dividend is well covered and Canadian Natural Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Canadian Natural Resources is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 46% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
On the whole, we feel that Canadian Natural Resources' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. 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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