OCI (AMS:OCI) shares are up 7.7% in the past three months. Given its impressive performance, we decided to look at the company’s key financial indicators, as a company’s long-term fundamentals often dictate market results. In particular, we will be paying attention to OCI’s ROE today.
Return on equity, or ROE, is a test of how effectively a company increases its value and manages investor money. Put another way, it reveals the company’s success in turning shareholder investments into profits.
Check out our latest OCI analysis
How is return on capital calculated?
the formula for return on capital it is:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So, based on the formula above, the ROE for OCI is:
58% = $2.7 billion ÷ $4.7 billion (based on the last twelve months through September 2022).
The ‘return’ is the annual profit. One way to conceptualize this is that for every euro of share capital it has, the company made 0.58 euros of profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an efficient profit-making indicator of a company’s future earnings. Based on how much of its earnings the business chooses to reinvest or “hold,” we can assess a business’s future ability to generate earnings. Assuming all else being equal, companies that have a higher return on equity and higher earnings retention are typically the ones with a higher growth rate compared to companies that do not have the same characteristics.
OCI earnings growth and 58% ROE
First things first, we like that OCI has impressive ROE. Second, even when compared to the industry average of 12%, the company’s ROE is pretty impressive. So the substantial 68% net income growth seen by OCI over the past five years is not too surprising.
We then compare OCI’s net income growth to the industry and are pleased to see that the company’s growth figure is higher compared to the industry, which has a growth rate of 11% in the same period.
Earnings growth is a very important factor in stock valuation. It is important for an investor to know whether the market has priced in the growth (or decline) of the company’s expected earnings. If he does, he’ll help them determine whether the future of the stock looks rosy or ominous. Is OCI fairly valued? This infographic on intrinsic company value has everything you need to know.
Is OCI efficiently reinvesting its earnings?
OCI has a significant three-year median payout ratio of 66%, which means the company only retains 34% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Studying the most recent analyst consensus data, we found that the company’s future pay ratio is expected to rise to 94% over the next three years. Consequently, the higher expected payout ratio explains the decrease in the company’s expected ROE (to 29%) over the same period.
Overall, we believe that OCI’s performance has been quite good. We are particularly impressed by the company’s considerable earnings growth, which was likely supported by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings despite that, so that’s probably a good sign. That being the case, according to the latest forecasts from industry analysts, the company’s earnings are expected to decline in the future. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
Do you have comments on this article? Worried about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St does not have a position in any of the mentioned stocks.
Join a paid user research session
you will receive a $30 Amazon Gift Card for 1 hour of your time while you help us build better investment tools for individual investors like you. sign up here