Is Public Joint Stock Company Gazprom Neft's (MCX:SIBN) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
July 25, 2021
MISX:SIBN
Source: Shutterstock

Gazprom Neft's (MCX:SIBN) stock is up by a considerable 16% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Gazprom Neft's ROE today.

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.

See our latest analysis for Gazprom Neft

How To 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 Gazprom Neft is:

9.4% = ₽220b ÷ ₽2.3t (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each RUB1 of shareholders' capital it has, the company made RUB0.09 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. 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 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.

A Side By Side comparison of Gazprom Neft's Earnings Growth And 9.4% ROE

It is hard to argue that Gazprom Neft's ROE is much good in and of itself. However, when compared to the industry average of 5.5%, we do feel there's definitely more to the company. Particularly, the modest 8.0% net income growth seen by Gazprom Neft over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

As a next step, we compared Gazprom Neft's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.4%.

past-earnings-growth
MISX:SIBN Past Earnings Growth July 25th 2021

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Gazprom Neft is trading on a high P/E or a low P/E, relative to its industry.

Is Gazprom Neft Using Its Retained Earnings Effectively?

Gazprom Neft has a healthy combination of a moderate three-year median payout ratio of 38% (or a retention ratio of 62%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Gazprom Neft 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 50% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Gazprom Neft's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. 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.
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