HF Sinclair Corporation (NYSE:DINO) Stock Soars But Financial Data Seems Inconsistent: Will the Uptrend Continue?
HF Sinclair (NYSE:DINO) has had a great run in the equity market with a significant 30% rise in its stock over the past three months. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. Specifically, we decided to study the ROE of HF Sinclair in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for HF Sinclair
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for HF Sinclair is:
7.5% = $666 million ÷ $8.9 billion (based on trailing 12 months to March 2022).
The “return” is the annual profit. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.07.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of HF Sinclair’s earnings growth and 7.5% ROE
At first glance, there isn’t much to say about HF Sinclair’s ROE. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 18%. For this reason, HF Sinclair’s 17% decline in net income over five years is not surprising given its low ROE. However, there could also be other factors leading to lower income. Such as – low income retention or poor capital allocation.
As a next step, we benchmarked HF Sinclair’s performance against the industry and found that HF Sinclair’s performance is depressing even against the industry, which cut profits at a rate of 7.1% in over the same period, which is slower than the company. .
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Has the market priced DINO’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does HF Sinclair effectively reinvest its profits?
HF Sinclair’s low median three-year payout ratio of 21% (or a retention rate of 79%) over the past three years should mean the company is retaining most of its earnings to fuel growth, but the company’s profits actually declined. This should generally not be the case when a company retains most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, HF Sinclair has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to reach 29% over the next three years. However, HF Sinclair’s future ROE is expected to increase to 12% despite the company’s expected increase in payout ratio. We infer that there could be other factors that could be driving the company’s anticipated ROE growth.
All in all, we’re a bit ambivalent about HF Sinclair’s performance. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. Additionally, the latest analyst forecasts reveal that the company’s earnings growth is expected to be similar to its current growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.