Is Energean plc's (LON:ENOG) ROE Of 42% Impressive?

Energean plc (LON:ENOG) has been making waves in the oil and gas industry with its impressive return on equity (ROE) of 42%. This high ROE has caught the attention of investors and analysts alike, but is it truly impressive? Let's delve into the details to find out.

High ROE, High Debt

Energean's ROE of 42% is indeed impressive when compared to the industry average of 7.5%. However, it's essential to consider the company's high debt levels, which have a significant impact on its ROE. Energean has a debt-to-equity ratio of 4.96, much higher than the industry average. This high level of debt increases the company's financial risk and can lead to a higher ROE, as the interest payments on the debt are not included in the calculation of net income. However, this also means that the company's ROE may not be as sustainable as it appears, as it may not be able to maintain its high debt levels in the long term. Additionally, if the company's earnings were to decline, its ROE could also decrease significantly due to the fixed interest payments on its debt.



Sustainability of Energean's ROE

To assess the sustainability of Energean's ROE in the long term, we can examine the company's financial history, its ability to generate cash, and its debt levels. Here are some key points to consider:

1. Historical ROE: Energean's ROE has been consistently high, with a trailing twelve-month ROE of 43.04%. This suggests that the company has been effectively reinvesting shareholder capital. However, it's important to note that this high ROE is partly due to the company's significant use of debt.
2. Cash Flow: Energean's operating cash flow (OCF) margin is 26.70%, which indicates that the company generates a substantial amount of cash from its operations. A high OCF margin is a positive sign for the sustainability of the company's ROE, as it suggests that the company can maintain its high returns on equity without relying solely on debt financing.
3. Debt Levels: Energean has a high debt-to-equity ratio of 4.99, which means that the company relies heavily on debt to finance its operations. While this can boost the company's ROE, it also introduces additional risk. To maintain a sustainable ROE in the long term, Energean must manage its debt levels effectively and ensure that it can service its debt obligations.
4. Future Growth: Energean is forecast to grow its earnings and revenue by 2.2% and 3.1% per annum, respectively. EPS is expected to grow by 2.4% per annum, and the company's return on equity is forecast to be 74.6% in 3 years. These projections suggest that Energean's ROE may be sustainable in the long term, as the company is expected to continue generating strong returns on shareholder capital.

Conclusion

In conclusion, Energean's ROE of 42% is indeed impressive, but it's essential to consider the company's high debt levels and the potential risks associated with them. While Energean's ROE may be sustainable in the long term, the company must manage its debt levels effectively to maintain a stable financial position. Investors should monitor Energean's debt levels and cash flow generation to ensure that the company's ROE remains sustainable.