Advertisement
UK markets closed
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • FTSE 250

    19,884.73
    +74.07 (+0.37%)
     
  • AIM

    743.26
    +1.15 (+0.15%)
     
  • GBP/EUR

    1.1693
    -0.0001 (-0.01%)
     
  • GBP/USD

    1.2613
    -0.0009 (-0.07%)
     
  • Bitcoin GBP

    55,648.75
    -435.64 (-0.78%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • CAC 40

    8,205.81
    +1.00 (+0.01%)
     

Will Weakness in EOG Resources, Inc.'s (NYSE:EOG) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at EOG Resources' (NYSE:EOG) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study EOG Resources' ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for EOG 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

ADVERTISEMENT

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

37% = US$9.4b ÷ US$25b (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.37 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

EOG Resources' Earnings Growth And 37% ROE

Firstly, we acknowledge that EOG Resources has a significantly high ROE. Additionally, a comparison with the average industry ROE of 32% also portrays the company's ROE in a good light. So, EOG Resources' moderate 20% growth over the past five years was probably backed by the high ROE.

As a next step, we compared EOG 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 22% 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). This then helps them determine if the stock is placed for a bright or bleak future. What is EOG worth today? The intrinsic value infographic in our free research report helps visualize whether EOG is currently mispriced by the market.

Is EOG Resources Making Efficient Use Of Its Profits?

EOG Resources has a healthy combination of a moderate three-year median payout ratio of 27% (or a retention ratio of 73%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, EOG 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 is expected to rise to 58% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 20% over the same period.

Summary

On the whole, we feel that EOG 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here