With its stock down 9.7% over the past three months, it is easy to disregard Crescent Energy (NYSE:CRGY). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Crescent Energy's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Crescent Energy is:
1.3% = US$47m ÷ US$3.6b (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.01 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Crescent Energy's Earnings Growth And 1.3% ROE
It is hard to argue that Crescent Energy's ROE is much good in and of itself. Even compared to the average industry ROE of 16%, the company's ROE is quite dismal. Despite this, surprisingly, Crescent Energy saw an exceptional 43% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
We then performed a comparison between Crescent Energy's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 40% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Crescent Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Crescent Energy Using Its Retained Earnings Effectively?
Crescent Energy's ' three-year median payout ratio is on the lower side at 12% implying that it is retaining a higher percentage (88%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Moreover, Crescent Energy is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.
Summary
On the whole, we do feel that Crescent Energy has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.