Coterra Energy Inc.'s (NYSE:CTRA) Stock Is Going Strong: Is the Market Following Fundamentals?

Coterra Energy's (NYSE:CTRA) stock is up by a considerable 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Coterra Energy's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Coterra Energy

How Is ROE Calculated?

ROE 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 Coterra Energy is:

12% = US$1.6b ÷ US$13b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Coterra Energy's Earnings Growth And 12% ROE

At first glance, Coterra Energy seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 20% does temper our expectations. That being the case, the significant five-year 43% net income growth reported by Coterra Energy comes as a pleasant surprise. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.

We then performed a comparison between Coterra Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 37% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CTRA worth today? The intrinsic value infographic in our free research report helps visualize whether CTRA is currently mispriced by the market.

Is Coterra Energy Using Its Retained Earnings Effectively?

Coterra Energy's three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Coterra Energy is reinvesting its earnings efficiently.

Moreover, Coterra Energy 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 37% over the next three years. As a result, the expected drop in Coterra Energy's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.

Conclusion

On the whole, we feel that Coterra Energy's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. 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. 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.