It is hard to get excited after looking at ConocoPhillips' (NYSE:COP) recent performance, when its stock has declined 9.2% over the past three months. 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. In this article, we decided to focus on ConocoPhillips' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for ConocoPhillips

How To Calculate Return On Equity?

Return on equity 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 ConocoPhillips is:

20% = US$9.9b ÷ US$50b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.20 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. 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.

ConocoPhillips' Earnings Growth And 20% ROE

To start with, ConocoPhillips' ROE looks acceptable. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. This probably laid the ground for ConocoPhillips' significant 27% net income growth seen over the past five years. We believe that there might also 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.

We then compared ConocoPhillips' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 40% in the same 5-year period, which is a bit concerning.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is COP fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is ConocoPhillips Using Its Retained Earnings Effectively?

ConocoPhillips' three-year median payout ratio is a pretty moderate 42%, meaning the company retains 58% of its income. By the looks of it, the dividend is well covered and ConocoPhillips is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, ConocoPhillips has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 38% of its profits over the next three years. As a result, ConocoPhillips' ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Conclusion

On the whole, we feel that ConocoPhillips' performance has been quite good. 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 respectable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.