Oil and Natural Gas Corporation Limited's (NSE:ONGC) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Oil and Natural Gas' (NSE:ONGC) stock increased significantly by 35% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Oil and Natural Gas' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Oil and Natural Gas

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 Oil and Natural Gas is:

15% = ₹513b ÷ ₹3.4t (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.15 in profit.

What Has ROE Got To Do With 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 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.

Oil and Natural Gas' Earnings Growth And 15% ROE

At first glance, Oil and Natural Gas seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. Consequently, this likely laid the ground for the impressive net income growth of 23% seen over the past five years by Oil and Natural Gas. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Oil and Natural Gas' 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 23% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for ONGC? You can find out in our latest intrinsic value infographic research report.

Is Oil and Natural Gas Efficiently Re-investing Its Profits?

Oil and Natural Gas' three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. By the looks of it, the dividend is well covered and Oil and Natural Gas is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Oil and Natural Gas 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. As a result, Oil and Natural Gas' ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.

Conclusion

In total, we are pretty happy with Oil and Natural Gas' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.