Yahoo Finance Constellation Energy Corporation's (NASDAQ:CEG) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Constellation Energy (NASDAQ:CEG) has had a great run on the share market with its stock up by a significant 66% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Constellation Energy's ROE.
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.
See our latest analysis for Constellation Energy
How Do You Calculate Return On Equity?
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 Constellation Energy is:
14% = US$1.6b ÷ US$11b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Constellation Energy's Earnings Growth And 14% ROE
To start with, Constellation Energy's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.0%. However, we are curious as to how the high returns still resulted in flat growth for Constellation Energy in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Constellation Energy's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.4% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is CEG worth today? The intrinsic value infographic in our free research report helps visualize whether CEG is currently mispriced by the market.
Is Constellation Energy Making Efficient Use Of Its Profits?
Constellation Energy's low three-year median payout ratio of 10%, (meaning the company retains90% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
Only recently, Constellation Energy started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 22% over the next three years. Regardless, the future ROE for Constellation Energy is speculated to rise to 23% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
Summary
In total, it does look like Constellation Energy has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
