U.S. markets closed
  • S&P Futures

    4,116.25
    -10.25 (-0.25%)
     
  • Dow Futures

    33,653.00
    -50.00 (-0.15%)
     
  • Nasdaq Futures

    13,725.25
    -69.00 (-0.50%)
     
  • Russell 2000 Futures

    2,180.80
    -3.20 (-0.15%)
     
  • Crude Oil

    62.61
    +0.17 (+0.27%)
     
  • Gold

    1,781.60
    +3.20 (+0.18%)
     
  • Silver

    25.88
    +0.04 (+0.15%)
     
  • EUR/USD

    1.2039
    -0.0001 (-0.01%)
     
  • 10-Yr Bond

    1.5620
    -0.0390 (-2.44%)
     
  • Vix

    18.68
    +1.39 (+8.04%)
     
  • GBP/USD

    1.3938
    +0.0001 (+0.01%)
     
  • USD/JPY

    107.9100
    -0.1600 (-0.15%)
     
  • BTC-USD

    56,032.40
    +1,199.77 (+2.19%)
     
  • CMC Crypto 200

    1,283.26
    +48.84 (+3.96%)
     
  • FTSE 100

    6,859.87
    -140.21 (-2.00%)
     
  • Nikkei 225

    28,584.96
    -515.42 (-1.77%)
     

Are Strong Financial Prospects The Force That Is Driving The Momentum In Mercury General Corporation's NYSE:MCY) Stock?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

Most readers would already be aware that Mercury General's (NYSE:MCY) stock increased significantly by 29% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Mercury General's ROE in this article.

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.

View our latest analysis for Mercury General

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Mercury General is:

13% = US$240m ÷ US$1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Mercury General's Earnings Growth And 13% ROE

To begin with, Mercury General seems to have a respectable ROE. On comparing with the average industry ROE of 8.8% the company's ROE looks pretty remarkable. This probably laid the ground for Mercury General's significant 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Mercury General's growth is quite high when compared to the industry average growth of 6.9% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mercury General is trading on a high P/E or a low P/E, relative to its industry.

Is Mercury General Efficiently Re-investing Its Profits?

Mercury General has a significant three-year median payout ratio of 80%, meaning the company only retains 20% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Mercury General has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 71%.

Summary

On the whole, we feel that Mercury General's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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. 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 (at) simplywallst.com.