Ovintiv Inc.'s (NYSE:OVV) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Ovintiv (NYSE:OVV) has had a rough three months with its share price down 13%. 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. In this article, we decided to focus on Ovintiv's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Ovintiv

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Ovintiv is:

19% = US$1.9b ÷ US$10b (Based on the trailing twelve months to March 2024).

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 $0.19 in profit.

What Has ROE Got To Do With 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. 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.

Ovintiv's Earnings Growth And 19% ROE

At first glance, Ovintiv seems to have a decent ROE. Even when compared to the industry average of 18% the company's ROE looks quite decent. This probably goes some way in explaining Ovintiv's significant 38% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Ovintiv's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 38% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for OVV? You can find out in our latest intrinsic value infographic research report.

Is Ovintiv Using Its Retained Earnings Effectively?

Ovintiv has a really low three-year median payout ratio of 7.8%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Ovintiv is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Ovintiv has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 20% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 15% over the same period.

Summary

In total, we are pretty happy with Ovintiv'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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com