Has Golar LNG Limited's (NASDAQ:GLNG) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Unlock stock picks and a broker-level newsfeed that powers Wall Street.

Simply Wall St

Sat, Sep 23, 2023, 7:20 AM 4 min read

Golar LNG's (NASDAQ:GLNG) stock is up by a considerable 14% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Golar LNG's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Golar LNG

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 Golar LNG is:

5.9% = US$151m ÷ US$2.6b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.06.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Golar LNG's Earnings Growth And 5.9% ROE

At first glance, Golar LNG's ROE doesn't look very promising. Next, when compared to the average industry ROE of 28%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Golar LNG was able to grow its net income considerably, at a rate of 57% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Golar LNG's growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.

past-earnings-growth — NasdaqGS:GLNG Past Earnings Growth September 23rd 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Golar LNG's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Golar LNG Efficiently Re-investing Its Profits?

Golar LNG's ' three-year median payout ratio is on the lower side at 6.5% implying that it is retaining a higher percentage (94%) of its profits. So it looks like Golar LNG is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Golar LNG 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 42% over the next three years. However, Golar LNG's future ROE is expected to rise to 11% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, it does look like Golar LNG has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.