Has LyondellBasell Industries N.V. (NYSE:LYB) Stock's Recent Performance Got Anything to Do With Its Financial Health?

LyondellBasell Industries NV -1.05% Pre

LyondellBasell Industries NV

LYB

100.46

100.46

-1.05%

0.00% Pre

Most readers would already know that LyondellBasell Industries' (NYSE:LYB) stock increased by 1.9% over the past 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. In this article, we decided to focus on LyondellBasell Industries' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for LyondellBasell Industries

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for LyondellBasell Industries is:

17% = US$2.3b ÷ US$13b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.17 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

LyondellBasell Industries' Earnings Growth And 17% ROE

At first glance, LyondellBasell Industries seems to have a decent ROE. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. As you might expect, the 2.5% net income decline reported by LyondellBasell Industries is a bit of a surprise. Therefore, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

That being said, we compared LyondellBasell Industries' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same 5-year period.

past-earnings-growth
NYSE:LYB Past Earnings Growth December 29th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LYB fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is LyondellBasell Industries Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 40% (or a retention ratio of 60%) which is pretty normal, LyondellBasell Industries' declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, LyondellBasell Industries has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 55% over the next three years. Still, forecasts suggest that LyondellBasell Industries' future ROE will rise to 21% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that LyondellBasell Industries certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.

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