Is Northern Oil and Gas, Inc.'s (NYSE:NOG) Latest Stock Performance A Reflection Of Its Financial Health?

Northern Oil and Gas (NYSE:NOG) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Northern Oil and Gas' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Northern Oil and Gas

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Northern Oil and Gas is:

30% = US$594m ÷ US$2.0b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.30 in profit.

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.

Northern Oil and Gas' Earnings Growth And 30% ROE

First thing first, we like that Northern Oil and Gas has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. As a result, Northern Oil and Gas' exceptional 45% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Northern Oil and Gas' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 38% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. Is NOG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Northern Oil and Gas Using Its Retained Earnings Effectively?

Northern Oil and Gas has a really low three-year median payout ratio of 7.7%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Northern Oil and Gas is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Northern Oil and Gas is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 33% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 19% over the same period.

Conclusion

In total, we are pretty happy with Northern Oil and Gas' performance. 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. 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. 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.