Occidental Petroleum Corporation's (NYSE:OXY) Stock Is Going Strong: Is the Market Following Fundamentals?

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Simply Wall St

Sat, Sep 23, 2023, 6:00 AM 4 min read

Occidental Petroleum's (NYSE:OXY) stock is up by a considerable 12% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Occidental Petroleum's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Occidental Petroleum

How Is ROE Calculated?

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 Occidental Petroleum is:

23% = US$6.8b ÷ US$29b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.23 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Occidental Petroleum's Earnings Growth And 23% ROE

Firstly, we acknowledge that Occidental Petroleum has a significantly high ROE. Additionally, a comparison with the average industry ROE of 28% also portrays the company's ROE in a good light. Given the circumstances, the significant 24% net income growth seen by Occidental Petroleum over the last five years is not surprising.

Next, on comparing Occidental Petroleum's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% over the last few years.

past-earnings-growth — NYSE:OXY Past Earnings Growth September 23rd 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Using Its Retained Earnings Effectively?

Occidental Petroleum's ' three-year median payout ratio is on the lower side at 1.9% implying that it is retaining a higher percentage (98%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 17% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 17%, over the same period.

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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.

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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.