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Could the market be wrong about PDC Energy, Inc. (NASDAQ: PDCE) given its attractive financial outlook?

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PDC Energy Inc (NASDAQ:PDCE) had a tough month with a 13% drop in its stock price. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on the ROE of PDC Energy.

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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for PDC Energy

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for PDC Energy is:

48% = US$1.9B ÷ US$4.0B (based on trailing 12 months to September 2022).

“Yield” is the income the business has earned over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.48.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. 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.

PDC Energy earnings growth and ROE of 48%

First, we recognize that PDC Energy has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 32%, which is quite remarkable. Thus, the substantial 51% growth in net income observed by PDC Energy over the past five years is not too surprising.

We then compared the growth of PDC Energy’s net income with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 6.8 % over the same period.

past earnings-growth

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if PDC Energy is trading on a high P/E or a low P/E, relative to its industry.

Is PDC Energy using its profits efficiently?

PDC Energy’s three-year median payout ratio to shareholders is 6.7%, which is quite low. This implies that the company retains 93% of its profits. So it looks like management is massively reinvesting earnings to grow their business, which is reflected in their earnings growth.

Although PDC Energy has increased its profits, it only recently started paying dividends, which likely means the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the company’s future payout ratio is expected to reach 11% over the next three years. Thus, the expected increase in the payout ratio explains the expected drop in the company’s ROE to 27%, over the same period.

Conclusion

Overall, we are quite satisfied with the performance of PDC Energy. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Feedback on this article? Concerned about content? Enter into a contract with us directly. You can also email the editorial team (at) Simplywallst.com.

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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