Exxon Mobil's (NYSE:XOM) stock up by 10.0% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Exxon Mobil's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Exxon Mobil
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Exxon Mobil is:
26% = US$53b ÷ US$207b (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.26 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 Exxon Mobil's Earnings Growth And 26% ROE
First thing first, we like that Exxon Mobil has an impressive ROE. Additionally, a comparison with the average industry ROE of 28% also portrays the company's ROE in a good light. As a result, Exxon Mobil's remarkable 27% net income growth seen over the past 5 years is likely aided by its high ROE.
We then performed a comparison between Exxon Mobil's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 28% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is XOM fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Exxon Mobil Using Its Retained Earnings Effectively?
The three-year median payout ratio for Exxon Mobil is 29%, which is moderately low. The company is retaining the remaining 71%. So it seems that Exxon Mobil is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Exxon Mobil is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 47% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 15% over the same period.
Summary
On the whole, we feel that Exxon Mobil's 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 sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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2023-09-14 13:00:34Z
CBMiT2h0dHBzOi8vZmluYW5jZS55YWhvby5jb20vbmV3cy9leHhvbi1tb2JpbC1jb3Jwb3JhdGlvbnMtbnlzZS14b20tMTMwMDM0ODE1Lmh0bWzSAVdodHRwczovL2ZpbmFuY2UueWFob28uY29tL2FtcGh0bWwvbmV3cy9leHhvbi1tb2JpbC1jb3Jwb3JhdGlvbnMtbnlzZS14b20tMTMwMDM0ODE1Lmh0bWw
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