Stock Analysis

Woodside Energy Group Ltd's (ASX:WDS) Stock Is Going Strong: Is the Market Following Fundamentals?

ASX:WDS
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Woodside Energy Group's (ASX:WDS) stock is up by a considerable 8.9% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Woodside Energy Group's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Woodside Energy Group

How To Calculate Return On Equity?

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 Woodside Energy Group is:

18% = US$6.6b ÷ US$37b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.18 in profit.

Why Is ROE Important For 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 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.

Woodside Energy Group's Earnings Growth And 18% ROE

To start with, Woodside Energy Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 20%. This probably goes some way in explaining Woodside Energy Group's significant 23% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Woodside Energy Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% in the same period.

past-earnings-growth
ASX:WDS Past Earnings Growth April 17th 2023

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. 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 Woodside Energy Group is trading on a high P/E or a low P/E, relative to its industry.

Is Woodside Energy Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 61% (implying that it keeps only 39% of profits) for Woodside Energy Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Woodside Energy Group 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 82% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 7.4% over the same period.

Conclusion

On the whole, we feel that Woodside Energy Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.

Valuation is complex, but we're here to simplify it.

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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.