Could The Market Be Wrong About TotalEnergies SE (EPA:TTE) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at TotalEnergies' (EPA:TTE) recent performance, when its stock has declined 8.5% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study TotalEnergies' 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.

View our latest analysis for TotalEnergies

How Is ROE Calculated?

ROE 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 TotalEnergies is:

18% = US$22b ÷ US$121b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.18 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. 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.

TotalEnergies' Earnings Growth And 18% ROE

To start with, TotalEnergies' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. Consequently, this likely laid the ground for the impressive net income growth of 29% seen over the past five years by TotalEnergies. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared TotalEnergies' 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 29% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is TTE worth today? The intrinsic value infographic in our free research report helps visualize whether TTE is currently mispriced by the market.

Is TotalEnergies Making Efficient Use Of Its Profits?

The three-year median payout ratio for TotalEnergies is 38%, which is moderately low. The company is retaining the remaining 62%. By the looks of it, the dividend is well covered and TotalEnergies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, TotalEnergies 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 41% of its profits over the next three years. As a result, TotalEnergies' ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Conclusion

On the whole, we feel that TotalEnergies' 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com