Has Golar LNG Limited's (NASDAQ:GLNG) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Golar LNG's (NASDAQ:GLNG) stock increased significantly by 20% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Golar LNG's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Golar LNG is:

3.4% = US$81m ÷ US$2.4b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.

Check out our latest analysis for Golar LNG

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Golar LNG's Earnings Growth And 3.4% ROE

As you can see, Golar LNG's ROE looks pretty weak. Not just that, even compared to the industry average of 14%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Golar LNG grew its net income at a significant rate of 32% 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.

Next, on comparing Golar LNG's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 37% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Golar LNG's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Golar LNG Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 85% (implying that it keeps only 15% of profits) for Golar LNG suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Golar LNG has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 95% of its profits over the next three years. Regardless, the future ROE for Golar LNG is predicted to rise to 6.1% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that Golar LNG has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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