Chevron Corporation (NYSE: CVX) stock is up but financial outlook looks weak: is the stock overvalued?


Most readers already know that Chevron (NYSE: CVX) stock rose significantly 7.0% over the past month. However, we wanted to take a closer look at its key financial indicators as markets typically pay for long-term fundamentals, and in this case, they don’t look very promising. In this article, we have decided to focus on Chevron’s ROE.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

See our latest review for Chevron

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Chevron is:

2.7% = US $ 3.6 billion ÷ US $ 134 billion (based on the last twelve months to June 2021).

The “return” is the profit of the last twelve months. Another way to look at this is that for every dollar of equity, the company was able to make $ 0.03 in profit.

Why is ROE important for profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

Chevron profit growth and 2.7% ROE

It’s hard to say that Chevron’s ROE is very good on its own. Not only that, even compared to the industry average of 12%, the company’s ROE is quite unremarkable. For this reason, Chevron’s 18% drop in net income over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout ratio or faces competitive pressures.

That being said, we compared Chevron’s performance to that of the industry and got worried when we found that while the company cut profits, the industry increased profits at a rate of 3. , 7% over the same period.

NYSE: CVX Past Profit Growth October 4, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Has the market assessed the future prospects of CLC? You can find out in our latest Intrinsic Value infographic research report.

Is Chevron Efficiently Reinvesting Its Profits?

Chevron has a high three-year median payout rate of 59% (that is, it keeps 41% of its profits). This suggests that the company pays most of its profits as dividends to its shareholders. This partly explains why its profits have declined. With only a little money reinvested in the business, earnings growth would obviously be little or no. Our risk dashboard should contain the 3 risks we have identified for Chevron.

Additionally, Chevron has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 73% over the next three years. Still, forecasts suggest that Chevron’s future ROE will reach 11% even if the company’s payout ratio is expected to increase. We assume that there could be other characteristics of the company that could be the source of the anticipated growth in the company’s ROE.


All in all, we would have thought carefully before deciding on any investment action regarding Chevron. Because the company does not reinvest much in the business and given the low ROE, it is not surprising that there is no or no growth in its earnings. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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