Declining Stock and Solid Fundamentals: Is The Market Wrong About CONSOL Energy Inc. (NYSE:CEIX)?

It is hard to get excited after looking at CONSOL Energy's (NYSE:CEIX) recent performance, when its stock has declined 21% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on CONSOL Energy's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for CONSOL Energy

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 CONSOL Energy is:

27% = US$413m ÷ US$1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

CONSOL Energy's Earnings Growth And 27% ROE

Firstly, we acknowledge that CONSOL Energy has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. Under the circumstances, CONSOL Energy's considerable five year net income growth of 54% was to be expected.

Next, on comparing with the industry net income growth, we found that CONSOL Energy's growth is quite high when compared to the industry average growth of 40% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about CONSOL Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CONSOL Energy Using Its Retained Earnings Effectively?

CONSOL Energy's three-year median payout ratio to shareholders is 9.0%, which is quite low. This implies that the company is retaining 91% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Along with seeing a growth in earnings, CONSOL Energy only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with CONSOL Energy's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.