Yahoo Finance Occidental Petroleum Corporation (NYSE:OXY) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Occidental Petroleum (NYSE:OXY) has had a rough month with its share price down 4.1%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Occidental Petroleum's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Occidental Petroleum
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Occidental Petroleum is:
45% = US$13b ÷ US$29b (Based on the trailing twelve months to September 2022).
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 $0.45 in profit.
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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Occidental Petroleum's Earnings Growth And 45% ROE
To begin with, Occidental Petroleum has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 32% the company's ROE is quite impressive. Despite this, Occidental Petroleum's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital
As a next step, we compared Occidental Petroleum's net income growth with the industry and discovered that the industry saw an average growth of 6.8% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Occidental Petroleum is trading on a high P/E or a low P/E, relative to its industry.
Is Occidental Petroleum Using Its Retained Earnings Effectively?
Occidental Petroleum's low LTM (or last twelve month) payout ratio of 3.1%, (meaning the company retains97% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
In addition, Occidental Petroleum has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 18% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 18%, over the same period.
Summary
On the whole, we do feel that Occidental Petroleum has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. In addition, on studying the latest analyst forecasts, we found that the company's earnings are expected to continue to shrink. 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.
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.
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