Stock Analysis

EOG Resources, Inc. (NYSE:EOG) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

Published
NYSE:EOG
Source: Shutterstock

It is hard to get excited after looking at EOG Resources' (NYSE:EOG) recent performance, when its stock has declined 8.6% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study EOG Resources' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for EOG Resources

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 EOG Resources is:

28% = US$7.9b ÷ US$28b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.28 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of EOG Resources' Earnings Growth And 28% ROE

To begin with, EOG Resources has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 23% the company's ROE is quite impressive. As a result, EOG Resources' exceptional 29% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between EOG Resources' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 33% in the same 5-year period.

past-earnings-growth
NYSE:EOG Past Earnings Growth December 10th 2023

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is EOG worth today? The intrinsic value infographic in our free research report helps visualize whether EOG is currently mispriced by the market.

Is EOG Resources Using Its Retained Earnings Effectively?

EOG Resources has a really low three-year median payout ratio of 24%, meaning that it has the remaining 76% left over to reinvest into its business. So it looks like EOG Resources is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, EOG Resources has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 49% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 20%) over the same period.

Conclusion

On the whole, we feel that EOG Resources' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether EOG Resources is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis