Naturgy Chile Gas Natural S.A.'s (SNSE:NTGCLGAS) Stock Is Going Strong: Is the Market Following Fundamentals?

Naturgy Chile Gas Natural's (SNSE:NTGCLGAS) stock is up by a considerable 15% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Naturgy Chile Gas Natural'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

We've discovered 1 warning sign about Naturgy Chile Gas Natural. View them for free.

How Do You Calculate Return On Equity?

Return on equity 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 Naturgy Chile Gas Natural is:

22% = CL$361b ÷ CL$1.6t (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CLP1 worth of shareholders' equity, the company generated CLP0.22 in profit.

Check out our latest analysis for Naturgy Chile Gas Natural

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Naturgy Chile Gas Natural's Earnings Growth And 22% ROE

To start with, Naturgy Chile Gas Natural's ROE looks acceptable. Even when compared to the industry average of 22% the company's ROE looks quite decent. This probably goes some way in explaining Naturgy Chile Gas Natural's significant 26% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Naturgy Chile Gas Natural's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Naturgy Chile Gas Natural's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Naturgy Chile Gas Natural Making Efficient Use Of Its Profits?

Naturgy Chile Gas Natural has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Naturgy Chile Gas Natural is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Naturgy Chile Gas Natural has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Naturgy Chile Gas Natural's performance. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Naturgy Chile Gas Natural visit our risks dashboard for free.

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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.