Can Mixed Financials Have A Negative Impact on Reinsurance Group of America, Incorporated's 's (NYSE:RGA) Current Price Momentum?
Most readers would already know that Reinsurance Group of America's (NYSE:RGA) stock increased by 8.2% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Particularly, we will be paying attention to Reinsurance Group of America's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Reinsurance Group of America
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Reinsurance Group of America is:
9.9% = US$909m ÷ US$9.2b (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.10 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Reinsurance Group of America's Earnings Growth And 9.9% ROE
At first glance, Reinsurance Group of America's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 13%. As a result, Reinsurance Group of America's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared Reinsurance Group of America's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.2% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Reinsurance Group of America's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Reinsurance Group of America Efficiently Re-investing Its Profits?
In spite of a normal three-year median payout ratio of 29% (or a retention ratio of 71%), Reinsurance Group of America hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Reinsurance Group of America 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 18% over the next three years. As a result, the expected drop in Reinsurance Group of America's payout ratio explains the anticipated rise in the company's future ROE to 13%, over the same period.
Conclusion
On the whole, we feel that the performance shown by Reinsurance Group of America can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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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 account of 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.
