With its share price down 10% in the past three months, it’s easy to ignore Shell (LON:SHEL). However, a closer look at the company’s financial health might make you think again. The company is worth keeping an eye on, given that fundamentals usually drive long-term market outcomes. Specifically, we decided to study Shell’s ROE in this article.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to evaluate a company’s profitability compared to its equity.
Check out our latest analysis for Shell.
How do you calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Shell’s ROE is:
10% = USD 19 billion ÷ USD 187 billion (based on trailing 12 months to June 2024).
“Return” is the profit over the past 12 months. This means that for every £1 of its shareholders’ investment, the company generates £0.10 in profit.
Why is ROE important for profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
Shell’s earnings growth and ROE 10%
First of all, Shell seems to have a respectable ROE. When we compare it to its industry, we find that its industry has a similar average ROE of 8.7%. This probably goes some way to explaining Shell’s impressive 28% growth in net income over the past five years, among other factors. We believe there are also other aspects that are positively impacting the company’s revenue growth. For example, the company’s management may have made good strategic decisions, or the company may have a low dividend payout ratio.
As a next step, we compared Shell’s net income growth with the industry and found that the company has a similar growth rate when compared to the industry average growth rate of 26% over the same period.
Past revenue growth
The foundations that give a company value have a lot to do with its revenue growth. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). That way, you’ll know if the stock is headed for clear blue waters or if a swamp awaits. What is SHEL worth today? The intrinsic value infographic in our free research report helps you visualize whether SHEL is currently mispriced by the market.
story continues
Is Shell making effective use of its retained earnings?
Shell’s median three-year dividend payout ratio is quite modest at 35%, which means the company retains 65% of its income. Therefore, it appears that Shell has delivered impressive growth in earnings (mentioned above) and reinvested them efficiently in a way that pays well-covered dividends.
Additionally, Shell has been paying dividends for at least 10 years. This means that the company is quite serious about sharing profits with shareholders. According to our latest analyst data, the company’s future payout ratio over the next three years is expected to be around 36%. Still, some predict that Shell’s future ROE will rise to 12%, even though Shell’s dividend payout ratio is not expected to change much.
summary
Overall, we are very happy with the shell’s performance. In particular, it’s great to see that the company has invested heavily in its business, delivering strong revenue growth along with high rates of return. That said, the company’s revenue growth is expected to slow, according to the latest industry analyst forecasts. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
Do you have feedback on this article? Interested in its content? Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
