Are Strong Financial Prospects The Force That Is Driving The Momentum In EOG Resources, Inc.'s NYSE:EOG) Stock?

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

Sat, Sep 30, 2023, 8:00 AM 3 min read

EOG Resources' (NYSE:EOG) stock is up by a considerable 11% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on EOG Resources' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for EOG Resources

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 EOG Resources is:

33% = US$8.7b ÷ US$26b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.33 in profit.

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. 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 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.

A Side By Side comparison of EOG Resources' Earnings Growth And 33% ROE

Firstly, we acknowledge that EOG Resources has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 28% which is quite remarkable. Under the circumstances, EOG Resources' considerable five year net income growth of 25% was to be expected.

As a next step, we compared EOG Resources' 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 28% in the same period.

past-earnings-growth — NYSE:EOG Past Earnings Growth September 30th 2023

Earnings growth is an important metric to consider when valuing a stock. 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. Is EOG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is EOG Resources Making Efficient Use Of Its Profits?

EOG Resources has a really low three-year median payout ratio of 25%, meaning that it has the remaining 75% left over to reinvest into its business. 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, EOG Resources 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 52% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 20%) over the same period.

Conclusion

Overall, we are quite pleased with EOG Resources' performance. 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. 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.