Yahoo Finance Magnolia Oil & Gas Corporation's (NYSE:MGY) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that Magnolia Oil & Gas' (NYSE:MGY) stock increased significantly by 22% over the past three months. 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. In this article, we decided to focus on Magnolia Oil & Gas' ROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Magnolia Oil & Gas
How Is ROE Calculated?
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 Magnolia Oil & Gas is:
24% = US$443m ÷ US$1.9b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.24 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Magnolia Oil & Gas' Earnings Growth And 24% ROE
To begin with, Magnolia Oil & Gas has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 20% also portrays the company's ROE in a good light. As a result, Magnolia Oil & Gas' remarkable 48% net income growth seen over the past 5 years is likely aided by its high ROE.
As a next step, we compared Magnolia Oil & Gas' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 37%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Magnolia Oil & Gas fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Magnolia Oil & Gas Efficiently Re-investing Its Profits?
Magnolia Oil & Gas' ' three-year median payout ratio is on the lower side at 9.7% implying that it is retaining a higher percentage (90%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Additionally, Magnolia Oil & Gas 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 23% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 14%, over the same period.
Summary
On the whole, we feel that Magnolia Oil & Gas' performance has been quite good. 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, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
