Declining Stock and Solid Fundamentals: Is The Market Wrong About Constellation Energy Corporation (NASDAQ:CEG)?

editorial-team@simplywallst.com (Simply Wall St)

Thu, May 1, 2025, 8:00 AM 3 min read

Constellation Energy (NASDAQ:CEG) has had a rough three months with its share price down 28%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Constellation Energy's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You 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 Constellation Energy is:

28% = US$3.7b ÷ US$14b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.28 in profit.

View our latest analysis for Constellation Energy

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Constellation Energy's Earnings Growth And 28% ROE

Firstly, we acknowledge that Constellation Energy has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 9.1% also doesn't go unnoticed by us. Under the circumstances, Constellation Energy's considerable five year net income growth of 40% was to be expected.

Next, on comparing with the industry net income growth, we found that Constellation Energy's growth is quite high when compared to the industry average growth of 5.9% in the same period, which is great to see.

past-earnings-growth — NasdaqGS:CEG Past Earnings Growth May 1st 2025

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. Has the market priced in the future outlook for CEG? You can find out in our latest intrinsic value infographic research report.

Is Constellation Energy Using Its Retained Earnings Effectively?

Constellation Energy's ' three-year median payout ratio is on the lower side at 15% implying that it is retaining a higher percentage (85%) of its profits. So it looks like Constellation Energy is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Constellation Energy has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 16%. Accordingly, forecasts suggest that Constellation Energy's future ROE will be 24% which is again, similar to the current ROE.

Summary

On the whole, we feel that Constellation Energy's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.