December 7, 2021

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Has Pioneer Natural Resources Company’s (NYSE:PXD) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Pioneer Natural Resources (NYSE:PXD) has had a great run on the share market with its stock up by a significant 35% over the last month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Pioneer Natural Resources’ ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Pioneer Natural Resources

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Pioneer Natural Resources is:

6.2% = US$756m ÷ US$12b (Based on the trailing twelve months to December 2019).

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 $0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learnt that ROE is a measure of a company’s profitability. 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.

A Side By Side comparison of Pioneer Natural Resources’ Earnings Growth And 6.2% ROE

When you first look at it, Pioneer Natural Resources’ ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 9.4% either. In spite of this, Pioneer Natural Resources was able to grow its net income considerably, at a rate of 24% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Pioneer Natural Resources’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 32% in the same period.

NYSE:PXD Past Earnings Growth April 30th 2020

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for PXD? You can find out in our latest intrinsic value infographic research report.

Is Pioneer Natural Resources Using Its Retained Earnings Effectively?

Pioneer Natural Resources’ ‘ three-year median payout ratio is on the lower side at 1.3% implying that it is retaining a higher percentage (99%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Pioneer Natural Resources is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 54% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change by much.

Summary

On the whole, we do feel that Pioneer Natural Resources has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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