U.S. markets closed
  • S&P 500

    4,136.48
    -43.28 (-1.04%)
     
  • Dow 30

    33,926.01
    -127.93 (-0.38%)
     
  • Nasdaq

    12,006.96
    -193.86 (-1.59%)
     
  • Russell 2000

    1,985.53
    -15.69 (-0.78%)
     
  • Crude Oil

    73.23
    -2.65 (-3.49%)
     
  • Gold

    1,877.70
    -53.10 (-2.75%)
     
  • Silver

    22.40
    -1.22 (-5.17%)
     
  • EUR/USD

    1.0797
    -0.0114 (-1.05%)
     
  • 10-Yr Bond

    3.5320
    +0.1360 (+4.00%)
     
  • GBP/USD

    1.2056
    -0.0173 (-1.41%)
     
  • USD/JPY

    131.1500
    +2.5460 (+1.98%)
     
  • BTC-USD

    23,379.75
    -67.74 (-0.29%)
     
  • CMC Crypto 200

    535.42
    -1.43 (-0.27%)
     
  • FTSE 100

    7,901.80
    +81.64 (+1.04%)
     
  • Nikkei 225

    27,509.46
    +107.41 (+0.39%)
     

Are Strong Financial Prospects The Force That Is Driving The Momentum In Humana Inc.'s NYSE:HUM) Stock?

Most readers would already be aware that Humana's (NYSE:HUM) stock increased significantly by 10% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Humana's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Humana

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Humana is:

17% = US$2.8b ÷ US$16b (Based on the trailing twelve months to September 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Humana's Earnings Growth And 17% ROE

To start with, Humana's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Humana's moderate 12% net income growth seen over the past five years.

We then compared Humana's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is HUM worth today? The intrinsic value infographic in our free research report helps visualize whether HUM is currently mispriced by the market.

Is Humana Efficiently Re-investing Its Profits?

In Humana's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

Besides, Humana has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 12%. As a result, Humana's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Conclusion

On the whole, we feel that Humana's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here