Ovintiv Inc. (NYSE:OVV) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?
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Ovintiv (NYSE:OVV) has had a rough three months with its share price down 23%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Ovintiv's ROE.
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.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Ovintiv is:
11% = US$1.1b ÷ US$10b (Based on the trailing twelve months to December 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 $0.11 in profit.
View our latest analysis for Ovintiv
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.
A Side By Side comparison of Ovintiv's Earnings Growth And 11% ROE
At first glance, Ovintiv seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 14% does temper our expectations. That being the case, the significant five-year 49% net income growth reported by Ovintiv comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.
As a next step, we compared Ovintiv's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 38%.