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Oil and Natural Gas Corporation Limited's (NSE:ONGC) Stock Is Going Strong: Have Financials A Role To Play?
Oil and Natural Gas (NSE:ONGC) has had a great run on the share market with its stock up by a significant 7.3% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Oil and Natural Gas' ROE today.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Oil and Natural Gas
How Is ROE Calculated?
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 Oil and Natural Gas is:
11% = ₹431b ÷ ₹3.8t (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.11 in profit.
Why Is ROE Important For 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 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 11% ROE
On the face of it, Oil and Natural Gas' ROE is not much to talk about. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Oil and Natural Gas' net income grew significantly at a rate of 25% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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.
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 26% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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?
The three-year median payout ratio for Oil and Natural Gas is 31%, which is moderately low. The company is retaining the remaining 69%. 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.
Additionally, Oil and Natural Gas 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 33%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.
Conclusion
On the whole, we do feel that Oil and Natural Gas has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
About NSEI:ONGC
Oil and Natural Gas
Engages in the exploration, development, and production of crude oil and natural gas in India and internationally.