Does EQT Corporation’s (NYSE:EQT) impressive stock performance have anything to do with its fundamentals?

EQT (NYSE:EQT) stock is up a remarkable 25% over the past three months. We wonder if and what role the company’s financials play in this price change, since a company’s long-term fundamentals usually determine market outcomes. In this article, we decided to focus on EQT’s ROE.

ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investments it receives from its shareholders. In other words, it shows the company’s success in converting shareholder investments into profits.

Check out our latest analysis for EQT

How do you calculate return on equity?

ROE can be calculated using the formula:

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

Based on the formula above, the ROE for EQT is:

1.5% = $316M ÷ $20B (Based on trailing twelve months ending September 2024).

The “return” is the amount earned after taxes over the last twelve months. Another way to think of it is that for every dollar of equity, the company was able to generate a profit of $0.02.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate will be compared to companies that don’t necessarily share these characteristics.

A Side-by-Side Comparison of EQT’s Earnings Growth and ROE of 1.5%

It’s quite clear that EQT’s ROE is rather low. Even compared to the industry average ROE of 15%, the company’s ROE is pretty dismal. Still, surprisingly, EQT has posted exceptional net income growth of 49% over the last five years. We assume that other factors could 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.

Next, when comparing with the industry’s net income growth, we found that EQT’s growth is quite high compared to the industry average of 40% in the same period, which is great to see.

The basis for a company’s valuation depends to a large extent on earnings growth. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This allows them to determine whether the stock’s future looks promising or threatening. If you’re wondering about EQT’s valuation, take a look at this measure of the company’s price-to-earnings ratio compared to the industry.

Does EQT use its profits efficiently?

EQT has a really low three-year median payout ratio of 9.0%, meaning it has the remaining 91% left over to invest in its business. So it looks like EQT is heavily reinvesting its profits to grow its business, which is reflected in its earnings growth.

In addition, EQT is committed to continuing to share its profits with shareholders, which we can infer from its long history of paying dividends for at least ten years. A look at the current analyst consensus data shows that the company’s future payout ratio is expected to rise to 19% over the next three years. However, EQT’s future ROE is expected to rise to 8.1% despite the expected increase in the company’s payout ratio. We conclude that there may be other factors that could drive the expected growth in the company’s ROE.

Summary

Overall, we think EQT definitely has some positive factors to consider. Despite the low return, the company has seen impressive profit growth thanks to significant reinvestments in its business. With this in mind, the latest industry analyst forecasts suggest that the company’s earnings growth is likely to slow. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our analyst forecasts page for the company.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.