Ovintiv Inc. (TSE:OVV) Stock on an Uptrend: Could Fundamentals Be Driving the Momentum?

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Ovintiv (TSE:OVV) stock is up 11% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. Concretely, we decided to study the ROE of Ovintiv in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Our analysis indicates that OVV is potentially undervalued!

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Ovintiv’s ROE is:

56% = US$3.7 billion ÷ US$6.6 billion (based on trailing 12 months to September 2022).

The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.56.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Ovintiv Earnings Growth and 56% ROE

First, we like that Ovintiv has an impressive ROE. Additionally, the company’s ROE is above the industry average of 27%, which is quite remarkable. Needless to say, we are quite surprised to see that Ovintiv’s bottom line has declined by 7.9% over the past five years. We feel there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.

That being said, we benchmarked Ovintiv’s performance against the industry and became concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 31% over of the same period.

TSX: OVV Prior Earnings Growth November 21, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is the OVV correctly valued? This intrinsic business value infographic has everything you need to know.

Is Ovintiv effectively using its profits?

When we piece together Ovintiv’s low three-year median payout ratio of 5.8% (where it retains 94% of its earnings), calculated for the last three-year period, we are intrigued by the lack of growth. The low payout should mean that the company keeps most of its profits and therefore should see some growth. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Additionally, Ovintiv has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 9.1% over the next three years. Thus, the expected increase in the payout ratio explains the expected drop in the company’s ROE to 31%, over the same period.

Conclusion

All in all, it seems that Ovintiv has positive aspects for its business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. Additionally, by studying current analyst estimates, we found that the company’s earnings growth should be about the same. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Valuation is complex, but we help make it simple.

Find out if Ovintiv is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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