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James River Group Holdings, Ltd. (NASDAQ:JRVR) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

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Simply Wall St
·4 min read
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James River Group Holdings (NASDAQ:JRVR) has had a great run on the share market with its stock up by a significant 24% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to James River Group Holdings' ROE today.

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.

Check out our latest analysis for James River Group Holdings

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for James River Group Holdings is:

4.9% = US$38m ÷ US$779m (Based on the trailing twelve months to December 2019).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learnt that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of James River Group Holdings' Earnings Growth And 4.9% ROE

On the face of it, James River Group Holdings' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 10% either. Therefore, James River Group Holdings' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared James River Group Holdings' net income growth with the industry and discovered that the industry saw an average growth of 8.0% in the same period.

NasdaqGS:JRVR Past Earnings Growth April 21st 2020
NasdaqGS:JRVR Past Earnings Growth April 21st 2020

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. Doing so will help them establish if the stock's future looks promising or ominous. What is JRVR worth today? The intrinsic value infographic in our free research report helps visualize whether JRVR is currently mispriced by the market.

Is James River Group Holdings Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 44% (meaning the company retains56% of profits) in the last three-year period, James River Group Holdings' earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, James River Group Holdings has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 45%. However, James River Group Holdings' ROE is predicted to rise to 8.5% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we're a bit ambivalent about James River Group Holdings' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.