Most readers already know that the share of Gazprom Neft (MCX: SIBN) has risen significantly by 22% in the last three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In this article, we have decided to focus on the ROE of Gazprom Neft.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Discover our latest analysis for Gazprom Neft
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Gazprom Neft is:
14% = ₽337b ÷ ₽2.4t (Based on the last twelve months up to June 2021).
The “return” is the amount earned after tax over the past twelve months. Another way to think about this is that for every RUB1 value of equity, the company was able to earn RUB 0.14 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Gazprom Neft’s profit growth and 14% ROE
At first glance, Gazprom Neft’s ROE is not much to say. However, the fact that its ROE is well above the industry average of 7.4% does not go unnoticed to us. This probably partly explains Gazprom Neft’s moderate 6.1% growth over the past five years, among other factors. Keep in mind that the company has a moderately low ROE. It’s just that the industry’s ROE is lower. Therefore, profit growth could also be the result of other factors. Such as- high profit retention or belonging to a company in a high growth industry.
Given that the industry has cut its profits at a rate of 4.7% over the same period, the growth in the company’s net income is quite impressive.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. If you are wondering about Gazprom Neft’s valuation, take a look at this gauge of its price / earnings ratio, compared to its sector.
Is Gazprom Neft Efficiently Using Its Retained Earnings?
Gazprom Neft has a three-year median payout rate of 38%, which means it keeps the remaining 62% of its profits. This suggests that its dividend is well hedged and, given the decent growth seen by the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, Gazprom Neft has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 45%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 12%.
Overall, we think Gazprom Neft’s performance has been quite good. Specifically, we like the fact that it reinvests a large portion of its earnings at a moderate rate of return, resulting in earnings expansion. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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