It's hard not to feel discouraged when looking at Suncor Energy's recent performance, with its stock dipping 6.7% over the last three months. However, a closer look reveals that its robust financials could hint at a potential long-term uptick, as markets typically favor companies with strong financial standings. Today, we'll delve into Suncor Energy's Return on Equity (ROE).
ROE, or return on equity, serves as a handy metric for assessing a company's ability to generate returns on shareholder investments. In essence, ROE indicates the profit each dollar generates concerning shareholder investments.
How is ROE Calculated?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, applying the formula, Suncor Energy's ROE stands at 20%, calculated as CA$8.2 billion divided by CA$42 billion (based on the trailing twelve months to September 2023).
This means that for every CA$1 worth of equity, the company was able to earn CA$0.20 in profit.
Relationship Between ROE and Earnings Growth
ROE not only acts as an indicator of profit generation but also provides insights into a company's future earnings potential. By analyzing how much of its profits a company reinvests or retains, we can evaluate its ability to generate future profits. Typically, firms with high ROE and profit retention tend to experience higher growth rates compared to those without these attributes.
Comparing Suncor Energy's Earnings Growth and 20% ROE
Initially, Suncor Energy appears to boast a decent ROE, especially when compared to the industry average of 17%. This likely contributed to the impressive net income growth of 25% witnessed over the past five years. However, other factors such as high earnings retention or efficient management might also be at play.
Upon comparing with industry net income growth, it's evident that Suncor Energy's reported growth falls short of the industry's 42% growth over the same period, which is a concerning observation.
Earnings growth is a crucial metric for valuing a stock. Investors must determine whether the expected earnings growth, or lack thereof, is factored into the share price. This assessment helps gauge the stock's future outlook.
Is Suncor Energy Efficiently Reinvesting Its Profits?
Suncor Energy's three-year median payout ratio is relatively moderate at 33%, indicating that the company retains 67% of its income. This efficient reinvestment strategy has likely contributed to the notable growth in earnings and the well-covered dividend payments.
Additionally, Suncor Energy's consistent dividend payouts over the past decade demonstrate its commitment to rewarding shareholders. Analysts' consensus data suggests that the company's future payout ratio is projected to increase to 47% over the next three years. Consequently, the expected rise in the payout ratio may lead to a decline in ROE to 14% over the same period.
In Summary
Overall, Suncor Energy's performance is commendable, particularly its substantial investments in business growth and the consequent rise in earnings. However, concerns arise from analysts' forecasts, which anticipate a future decline in earnings. Are these forecasts based on industry-wide expectations or the company's fundamentals? Click here for our analyst's forecasts page for further insights.
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