Are Robust Financials Driving The Recent Rally In Matador Resources Company’s (NYSE:MTDR) Stock?

Matador Resources’ (NYSE:MTDR) stock is up by a considerable 13% over the past month. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Matador Resources’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

The formula for return on equity ice:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Matador Resources is:

40% = US$1.1b ÷ US$2.7b (Based on the trailing twelve months to June 2022).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.40.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Matador Resources’ Earnings Growth And 40% ROE

First thing first, we like that Matador Resources has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 18% which is quite remarkable. Probably as a result of this, Matador Resources was able to see a decent net income growth of 8.7% over the last five years.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Matador Resources compares quite favorably to the industry average, which shows a decline of 4.9% in the same period.

past-earnings-growth
NYSE:MTDR Past Earnings Growth July 28th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Matador Resources fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Matador Resources Making Efficient Use Of Its Profits?

In Matador Resources’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 1.6% (or a retention ratio of 98%), which suggests that the company is investing most of its profits to grow its business.
Along with seeing a growth in earnings, Matador Resources only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 2.4% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 28%) over the same period.

Conclusion

On the whole, we feel that Matador Resources’ performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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 into account 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.

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