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Will Weakness in CONSOL Energy Inc.'s (NYSE:CEIX) Stock Prove Temporary Given Strong Fundamentals?
CONSOL Energy (NYSE:CEIX) has had a rough three months with its share price down 24%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study CONSOL Energy's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for CONSOL Energy
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 CONSOL Energy is:
40% = US$467m ÷ US$1.2b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.40 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 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.
CONSOL Energy's Earnings Growth And 40% ROE
First thing first, we like that CONSOL Energy has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 30% also doesn't go unnoticed by us. So, the substantial 21% net income growth seen by CONSOL Energy over the past five years isn't overly surprising.
We then compared CONSOL Energy's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 16% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 CONSOL Energy is trading on a high P/E or a low P/E, relative to its industry.
Is CONSOL Energy Using Its Retained Earnings Effectively?
CONSOL Energy's ' three-year median payout ratio is on the lower side at 9.3% implying that it is retaining a higher percentage (91%) of its profits. So it looks like CONSOL Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Conclusion
Overall, we are quite pleased with CONSOL Energy's 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
What are the risks and opportunities for CONSOL Energy?
CONSOL Energy Inc. produces and exports bituminous coal in the United States.
Rewards
Trading at 72.8% below our estimate of its fair value
Earnings grew by 1269% over the past year
Risks
Earnings are forecast to decline by an average of 0.01% per year for the next 3 years
Significant insider selling over the past 3 months
Further research on
CONSOL Energy
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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 NYSE:CEIX
CONSOL Energy
CONSOL Energy Inc. produces and exports bituminous coal in the United States.
Outstanding track record with excellent balance sheet and pays a dividend.
