Are Robust Financials Driving The Recent Rally In Canadian Natural Resources Limited's (TSE:CNQ) Stock?
Canadian Natural Resources (TSE:CNQ) has had a great run on the share market with its stock up by a significant 6.0% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Canadian Natural Resources' 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. 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?
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:
31% = CA$12b ÷ CA$38b (Based on the trailing twelve months to September 2022).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.31 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 31% ROE
Firstly, we acknowledge that Canadian Natural Resources has a significantly high ROE. Further, even comparing with the industry average if 27%, the company's ROE is quite respectable. As a result, Canadian Natural Resources' remarkable 30% 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 34% in the same period.
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 CNQ fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Canadian Natural Resources Efficiently Re-investing Its Profits?
The three-year median payout ratio for Canadian Natural Resources is 33%, which is moderately low. The company is retaining the remaining 67%. So it seems that Canadian Natural Resources is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Besides, Canadian Natural Resources has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 45% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 21%, over the same period.
On the whole, we feel that Canadian Natural Resources' 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, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.
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