Most traders will already be aware of Woodside Petroleum (ASX:WPL) shares rising 9.0% over the past three months. However, in this article, we will focus more on its weak financials or ASX:WPL weakness, as long-term fundamentals ultimately determine market outcomes. Specifically, this article will look at Woodside Petroleum’s ROE today. Return on equity or ROE is an important factor for shareholders to consider as it tells them how effectively their capital is being reinvested.

In simpler terms, it measures the profitability of a company in relation to shareholders’ equity. ROE (Return On Equity) is calculated as, ROE = Net Profit (from continuing operations) Shareholders’ Equity. So based on the formula, the ROE for Woodside Petroleum is 3.1% = US$405 million US$13 billion (based on the trailing twelve months to June 2021).

'Return' is the annual profit. That means that for every A$1 of shareholders' equity, the company makes A$0.03 of profit. The relationship between ROE and profit growth is that, as a measure of the efficient return on a company's future earnings, it depends on how much of its profits are reinvested or "retained" by the company. And how effectively it does so. So that it can assess the company's earnings growth potential.

With the same assumption, companies that have higher returns on equity and higher earnings retention are usually companies that have higher growth rates when compared to companies that do not have the same features. Woodside Petroleum's revenue growth and ROE of 3.1%. It is quite clear that Woodside Petroleum's ROE is rather low. Even when compared to the industry average of 4.9%, the ROE is quite disappointing. For this reason, Woodside Petroleum's five-year net income decline of 49% is not surprising considering its lower ROE.

There may be other factors at play here. For example, the business has been allocating capital poorly, or the company has a very high payout ratio. Therefore, this paper compares Woodside Petroleum’s performance to the industry and is concerned to find that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 14% over the same period. Earnings growth is a big factor in stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock.

That way, they will have an idea whether the stock is headed for clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check whether Woodside Petroleum is trading at a high P/E or a low P/E, relative to its industry.

With a high three-year average payout ratio of 90% (implying that 9.7% of profits are retained), the vast majority of Woodside Petroleum’s profits are paid out to shareholders, which explains the company’s shrinking earnings. With little reinvested in the business, earnings growth is likely to be low or non-existent. Furthermore, Woodside Petroleum has been paying dividends for at least ten years or more, suggesting that management must have sensed that shareholders prefer dividends to earnings growth.

Based on the latest analyst estimates, it is found that the company's future payout ratio over the next three years is expected to remain stable at 91%. Regardless, Woodside Petroleum's future ROE is expected to increase to 12% even though not much change is expected in its payout ratio. Overall, its ROE is very disappointing. Not to mention the lack of proper reinvestment in the business.

As a result, its revenue growth has also been quite disappointing. Thus, the latest industry analyst estimates show that analysts expect to see a big increase in the company's revenue growth rate. This is the news about ASX: WPL Weakening from GICTrade, Can the Market Correct the Stock Price? Also read articles other than ASX: WPL Weakening, Can the Market Correct the Stock Price, such as "Stock Analysis" only in the GIC Journal. Also train your trading skills by reading the ebook scalping guide book and following live trading at NFP live trading.