Declining Stock and Solid Fundamentals: Is The Market Wrong About Civitas Resources, Inc. (NYSE:CIVI)?

It is hard to get excited after looking at Civitas Resources' (NYSE:CIVI) recent performance, when its stock has declined 9.1% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Civitas Resources' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Civitas Resources

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Civitas Resources is:

11% = US$758m ÷ US$6.6b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Civitas Resources' Earnings Growth And 11% ROE

To begin with, Civitas Resources seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 18%. However, we are pleased to see the impressive 50% net income growth reported by Civitas Resources over the past five years. We reckon that there could be other factors at play here. 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. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.

As a next step, we compared Civitas Resources' 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 38%.

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. Is Civitas Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Civitas Resources Using Its Retained Earnings Effectively?

The three-year median payout ratio for Civitas Resources is 44%, which is moderately low. The company is retaining the remaining 56%. By the looks of it, the dividend is well covered and Civitas Resources is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Civitas Resources has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Civitas Resources' 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. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.