Is Occidental Petroleum Corporation's (NYSE:OXY) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Occidental Petroleum (NYSE:OXY) has had a great run on the share market with its stock up by a significant 6.8% over the last month. 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 Occidental Petroleum's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Occidental Petroleum

How Do You Calculate Return On Equity?

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 Occidental Petroleum is:

12% = US$4.2b ÷ US$35b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.12.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Occidental Petroleum's Earnings Growth And 12% ROE

To start with, Occidental Petroleum's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. This probably goes some way in explaining Occidental Petroleum's significant 48% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Occidental Petroleum'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 40% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is OXY worth today? The intrinsic value infographic in our free research report helps visualize whether OXY is currently mispriced by the market.

Is Occidental Petroleum Efficiently Re-investing Its Profits?

Occidental Petroleum's ' three-year median payout ratio is on the lower side at 6.0% implying that it is retaining a higher percentage (94%) of its profits. So it looks like Occidental Petroleum is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Occidental Petroleum 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 22% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Occidental Petroleum's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.