Occidental Petroleum Corporation (NYSE:OXY) Stock Is Down, But Fundamentals Look Strong: Is the Market Wrong?

Occidental Petroleum (NYSE:OXY) has had a tough three months, with its stock price falling 12%. However, if you look closely, you might conclude that the good financials could mean the stock could potentially see appreciation in the long term, given how markets typically reward companies with good financial health. Today we will pay particular attention to Occidental Petroleum's ROE.

Return on equity or ROE is an important factor that a shareholder must consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on capital provided by the company's shareholders.

Check out our latest analysis for Occidental Petroleum

The Return on equity formula Is:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Occidental Petroleum is:

14% = $4.4 billion ÷ $32 billion (Based on trailing twelve months ending June 2024).

“Return” refers to a company’s profit over the last year. One way to understand this is that for every $1 of shareholder capital, the company made $0.14 in profit.

We have already established that ROE serves as an efficient profit-generating measure of a company's future earnings. Depending on how much of these profits the company reinvests or “retains” and how effectively it does so, we can then assess a company's earnings growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.

First of all, Occidental Petroleum's ROE looks acceptable. Furthermore, the company's ROE is in line with the industry average at 16%. This may have laid the foundation for the impressive 43% net income growth that Occidental Petroleum posted over the last five years. We assume that other factors could also play a role here. For example, it is possible that management has made some good strategic decisions or that the company has a low payout ratio.

We then conducted a comparison between Occidental Petroleum's net income growth and the industry. It found that the company's growth was similar to the average industry growth of 39% over the same five-year period.

The basis for a company's valuation depends to a large extent on earnings growth. The investor should try to find out whether the expected growth or decline in earnings (as the case may be) is priced in. This then helps him determine whether the stock is suitable for a bright or bleak future. Has the market priced in the future prospects for OXY? Find out in our latest intrinsic value infographic research report.

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