Is Civitas Resources, Inc.'s (NYSE:CIVI) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Civitas Resources (NYSE:CIVI) has had a great run on the share market with its stock up by a significant 11% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Civitas Resources' ROE in this article.
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.
Check out our latest analysis for Civitas Resources
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 Civitas Resources is:
27% = US$1.4b ÷ US$5.1b (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Civitas Resources' Earnings Growth And 27% ROE
First thing first, we like that Civitas Resources has an impressive ROE. Even when compared to the industry average of 31% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 62% net income growth seen by Civitas Resources was probably achieved as a result of the high ROE.
Next, on comparing with the industry net income growth, we found that Civitas Resources' growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for CIVI? You can find out in our latest intrinsic value infographic research report.
Is Civitas Resources Making Efficient Use Of Its Profits?
Civitas Resources' three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. So it seems that Civitas Resources is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
While Civitas Resources has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
Conclusion
In total, we are pretty happy with Civitas Resources' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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