Are Robust Financials Driving The Recent Rally In Erie Indemnity Company's (NASDAQ:ERIE) Stock?
Want to participate in a short research study? Help shape the future of investing tools and earn a $40 gift card!
Most readers would already be aware that Erie Indemnity's (NASDAQ:ERIE) stock increased significantly by 14% over the past three months. Since the market usually pay 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. Particularly, we will be paying attention to Erie Indemnity's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Erie Indemnity
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 Erie Indemnity is:
27% = US$301m ÷ US$1.1b (Based on the trailing twelve months to March 2020).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.
Why Is ROE Important For 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. 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.
Erie Indemnity's Earnings Growth And 27% ROE
Firstly, we acknowledge that Erie Indemnity has a significantly high ROE. Secondly, even when compared to the industry average of 8.9% the company's ROE is quite impressive. This probably laid the groundwork for Erie Indemnity's moderate 14% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Erie Indemnity's growth is quite high when compared to the industry average growth of 8.3% in the same period, which is great to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Erie Indemnity's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Erie Indemnity Making Efficient Use Of Its Profits?
Erie Indemnity has a significant three-year median payout ratio of 68%, meaning that it is left with only 32% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Besides, Erie Indemnity has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Summary
In total, we are pretty happy with Erie Indemnity's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
